Working With a Financial Advisor

Working with a financial advisor may add “about 3%” in increased returns.

Does this claim sound pretty bold to you?  We should all be skeptical of advisors who promise market-beating returns because there is so much research demonstrating such claims are inaccurate.  Investors and investment professionals generally miss the returns of the market instead of beating them. Where does that “about 3%” claim come from? Vanguard’s study on Quantifying the Value of an Advisor.

As a CFP® Professional working with clients for over a dozen years, I have learned to ignore performance claims, but when Vanguard releases research, I pay attention.  Remember — these are the folks who were founded by Jack Bogle, keep lowering the cost of investing and founded the indexing movement. In 2001 Vanguard began research on how an advisor adds value, and their findings are pretty logical:

  • Up to 1.15% in value from properly constructing a portfolio. This includes using lower cost investments and locating tax-inefficient asset classes (like bonds) in tax-deferred accounts.  The average mutual fund charged an expense ratio of 0.52% in 2017 — up to 0.88% for U.S. Small Cap and 0.98% for emerging market funds1.  Cost is a factor we control, and at EVOadvisers, is one we do. And owning bond funds makes sense for most investors, and keeping them in tax-deferred accounts like your 401(k) means you don’t pay tax on the income from those funds (though you do on your withdrawals in retirement).
  • Up to 1.45% for professional rebalancing and withdrawal strategies. These are two tough strategies for most people to design and implement — including most advisors. Effectively managing an investment portfolio requires making sure it stays in balance. For instance, when stocks do really well in a year, a portfolio may end up with a higher portion of stocks than originally planned and that may mean far too much risk in the portfolio.  A good rebalancing approach keeps that from happening, and does it in a cost-effective way. Transaction costs from buying and selling and tax costs from capital gains are two of many constraints to deal with when keeping a portfolio in balance. Taxes are also a major consideration when your portfolio is used for its ultimate purpose — funding your life when you don’t need to work full time.  An intelligently designed and managed portfolio withdrawal strategy can be significantly more tax-efficient than one that just happens (paying less tax leaves more money in your portfolio).
  • 1.5% or more for behavioral coaching. Nobody likes to think they need behavioral coaching. So let’s reframe this term — it’s simply implementing a long-range plan and following it. Usually, when the urge to change is strongest, the benefit of making a change is weakest2.  It is human nature to want to avoid the pain of a market reversal by changing the investments, or to invest in what sounds to be a great opportunity. Following a disciplined approach, we never have to make decisions like these.  More frequently, though, we see how people have not taken action to address inefficiencies in their financial life. A good financial advisor helps set the optimal savings rate, makes sure the right amount of insurance coverage at a low cost is in place, and makes sure financial mistakes of the past — expensive products sold by someone years ago — are removed.

Some of these benefits accrue every year.  Some are big hits in the first year and last a lifetime.  At EVOadvisers, we have found our clients present a range of opportunities for improving their financial position, and reap the benefits of breathing easier knowing where and why their money is spent and invested.  Financial planning has many intangible benefits, but the measurable benefits may be far greater than you expect. You can learn more about how we work with our clients at

1Morningstar Fund Fee Study 2017, May 2018; Vanguard Advisors Alpha® July 2018
2The Vanguard Advisor’s Alpha® guide to proactive behavioral coaching.