The value of a financial adviser
The fund manager Vanguard first produced a study in 2001 called Adviser Alpha which sought to determine the difference between the return that an investor might achieve with the adviser’s help and what they might have achieved on their own. Vanguard has put a value on that difference in the UK and it comes out at 3% a year.
They identified 7 components that add value:
- Setting a suitable asset allocation.
- Regular rebalancing.
- Minimising costs.
- Behavioural coaching.
- Making the most of tax allowances.
- Spending strategy.
- Total return versus income investing.
It’s important to understand that Vanguard is not claiming per se that a typical adviser will achieve an investment return of 3% a year more than the average private investor. What Vanguard is claiming is that the combined effect of all 7 components is equivalent to an extra return of approximately 3% a year.
Now, this is only one study and of course only one opinion. You could argue over the number of components and the value attributed to each one. After all, it is arguably subjective how much of a difference the adviser’s behavioural coaching, worth 1.5% of the total Adviser Alpha of 3%, would have made to the client’s investment outcomes because nobody knows for sure what the client would have done without the coaching.
However, in my personal experience of advising clients for more than 30 years I think Vanguard’s conclusions from their study are fair and are very much in line with my observations of clients over my career. Furthermore, it is supported by a number of studies in the US which have in fact shown that clients left to their own devices underperform the markets by 4% a year on average. So you could even argue that an Adviser Alpha is an underestimate of an adviser’s true worth!
So why is it that many people still decide to not engage the services of a professional financial planner? When personal experience and independent studies show that most private investors are better off working with a financial planner it is surprising that more people do not take advice from a professional.
Well, one of the reasons is because 50% of the UK adult population has no money to invest. Of the remaining 50% half prefer to self-invest and the other half use the services of a financial adviser. Whilst it is possible in a small minority of cases for some private investors to outperform financial advisers, and I have met some very successful self-investors in my time, these people are the exception that proves the rule. They are usually DIY investors who invest in a small portfolio of typically higher risk shares which they monitor themselves regularly. Such investors have certain advantages over financial advisers who have greater regulatory constraints than them.
- They are able to concentrate their investments into a small number of highly researched shares, typically 10-12.
- They can take greater risks by investing in smaller companies.
- They are usually full-time investors.
So by all means, if you have the time, inclination and skill to manage your own portfolio of shares then go ahead. If not then you might like to engage the services of a financial adviser if you accept that the Adviser Alpha is worth as much as Vanguard contend.
Whatever you decide to do you owe it to yourself to make your money sweat. You know it makes sense.