How can financial advisors amplify their value?
At Russell Investments, we focus on the value of advisors. Our annual report looks holistically at the real, measurable value advisors deliver for their clients, in their portfolios, and in vital services advisors provide. We developed a formula to calculate the full value equation of an advisor’s services.
This year, the data has shown a particular uptick in the value that advisors deliver through behavioral coaching. The topic is highly relevant to the increased volatility we’ve seen in markets in 2020. In fact, just this single category—of helping investors avoid behavioral mistakes—more than offsets the 1% fee advisors typically charge for their services. Despite this fact, there are still advisors who may be challenged to communicate the material value they deliver. So let’s look at the full value equation of an advisor’s services. The data clearly shows that the value is much greater than the fee.
In 2020, we believe the value of an advisor in the U.S. is calculated at 4.81%.
Downward fee pressure seems constant. It comes from regulators, robo-advisors, and even from demanding clients. Fees are top-of-mind for many investors. With the rise of passive solutions, it doesn’t seem hard to throw together a winning portfolio. This view completely overlooks the fact that standard investment selection is just one part of an advisor’s value.
But often advisors struggle to clearly articulate that the value their clients can derive materially exceeds the 1% fee they typically charge. Let’s make that easier. We’ve run the data to measure the value advisors deliver. Then, we’ve created an easy-to-remember formula to help advisors communicate their value. It’s as easy as ABC.
The value of an advisor study is meant to quantify the contribution the technical and emotional guidance a trusted human advisor can offer. The formula we created is designed to categorize the areas of value creation in a repeatable, memorable way:
When markets are rising calmly, it can be easy to underestimate the importance of disciplined rebalancing. But when volatility strikes, this annual process gets the attention it deserves.
Avoiding unnecessary risk exposure. As this chart demonstrates, a hypothetical balanced index portfolio that has not been rebalanced would look more like a growth portfolio and expose the investor to risk they didn’t agree to.
Additional Returns, Regular rebalancing has the potential to add 0.32% in additional returns and 0.4% in risk mitigation
While 0.32% may not seem like much, compounded over a multi-year period, it can quickly add up. In the hypothetical example above, that’s a $100,000 difference.
Behavioral mistakes cost real money. They can happen at any point in the market cycle.
That’s why we believe behavior coaching is one of the most vital parts of the advisor job description. And when it comes to delivering value, avoiding behavioral mistakes may be the most significant contributor to total value. Left to their own devices, many investors buy high and sell low. From January 2000 to December 2019, $100 constantly invested in the Russell 3000® Index more than tripled in value. And those that chose to stay in cash during that period missed a cumulative return of nearly 250%, based on the Russell 3000® Index.
No one likes to consider themselves to be an average investor. But the numbers don’t lie.
Statistically, the average stock-fund investor’s inclination to chase past performance cost them 2.17% annually in the 35-year period from 1984–2019. By working with an advisor,
investors can address this issue. We believe an advisor’s ability to help clients stick to their long-term financial plan and skirt irrational, emotional decisions adds this value: 2.17%.
You can’t get much more bare-bones than that. But we understand the importance of quantifying this aspect of an advisor’s job. Robo-advisors that deliver investment-only management and no financial plan, ongoing service, or guidance have set prices at approximately 0.29%1—for annual statements, online access, and a phone number to call in case of questions.
1Based on the average fee charged for investment-only management by 10 robo-advice offerings for a client portfolio of $500,000 as accessed on Ignites Article – Top 10 robo advisors June 2018, <a href=”bankrate.com/investing/best-robo-advisers/” target=”_blank”>bankrate.com/investing/best-robo-advisers/</a>, and individual robo advisor websites on 2/6/2020.
Outcomes matter. Advisors understand that. But it’s worth stating that financial advisors add value by doing the hard work of shepherding a strategy from origination to the final outcome investors desire. That means building and regularly updating custom financial plans, conducting regular portfolio reviews, and offering a long list of valuable, often overlooked ancillary services. These might include tax & estate planning, college funding, 401(k) review, investment & cashflow analysis, Social Security & retirement income planning, assistance with annual tax return preparation and one-off custom requests from clients.
Per a recent financial planning study conducted by Kitces, the average standalone planning fee for a comprehensive plan was around $2,080, which is 0.52% on a $400k account.2 Are your clients aware of that value? They should be.
True wealth management is also an intentional, valuable process. It begins with a deep discovery conversation that requires the professional guidance of an advisor. It is then followed by translating that conversation into goals, circumstances and preferences. The framework is wrapped in a cycle of continuous communication.
Over our decades of practice management, too often we have found that advisors and their team consistently underestimate the value of the ancillary services they provide to clients, such as addressing insurance needs, custom requests and questions. These additional services can quickly consume 20, 50, or 100 hours each year. If the advisor is providing these ancillary services, we estimate that the total planning fee goes up by an additional 0.20%.
Let’s run the numbers. The average standalone planning fee for the most comprehensive plan with ancillary services was $2,880, which is 0.72% on a $400,000 account.2
As an advisor, one of the primary ways you deliver value is by helping your clients stay focused and on course. It’s not easy. Despite your best efforts, clients sometimes struggle to remember the plan you built together. A solution to this common problem is to provide them with a Client Engagement Roadmap. The Client Engagement Roadmap positions you as the coordinator of your clients’ multi-faceted financial affairs. It also helps your client articulate and then document their goals and objectives—a critical part of the process. Ask your Russell Investments representative for access to this easy-touse tool and value communication materials approved for client use.
Making a commitment to your clients—and in return having some expectations from clients, too.
Why is tax management important? Because taxes have the ability to seriously erode returns. While downward fee pressure can mean downward value trends in other areas, advisors who focus on tax-smart investing can distinguish themselves and demonstrate differentiating value. Because it’s not what you earn. It’s what you get to keep.
Just how much return can be added with a tax-smart approach? The average annual tax drag for the five years ending December 31, 2019 was significant. Investors in non-tax managed U.S. equity products (active, passive, and ETFs) lost on average 1.85% of their return to taxes. Those in tax-managed U.S. equity funds forfeited only 0.54%. That’s a value difference of 1.31%. With taxable investors holding $8.5 trillion of the $18.7 trillion invested in open-end mutual funds, this is a massive concern—and a massive opportunity for added value.3
Are you a tax-smart advisor? You can help increase your value by helping build and implement personalized, comprehensive, and tax-sensitive investment plans.
With a data-driven approach, this report is designed to quantify the value we believe a trusted human financial advisor can offer, through both technical and emotional guidance.
In 2020, we believe advisors delivering services and value above and beyond investmentonly advice have an estimated contributory value of 4.81%. Compare that to the 1% advisors typically charge in fees.
This value is a meaningful differentiator in a time of demanding investors, regulatory scrutiny and downward fee pressure. And by demonstrating to clients how their value greatly exceeds the fees charged, advisors can improve client satisfaction and arm their clients to advocate on their behalf.
At Russell Investments, we believe in the value of advisors. And the numbers back up our belief. We see the advantages you create for your clients. We know the commitment you bring to your relationships. This annual Value of an Advisor study quantifies that dedication and the resulting benefit. All you need to do is turn up the volume.
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