Unlocking Hidden Value: How Financial Advisors Boost Your Return

Oct 15, 2024 | 5 min read

You might wonder if working with a financial advisor is worth it. After all, can't you just invest in some index funds and call it a day? While that's not a bad start, skilled advisors can potentially add significant value to your investment returns. Let's break down how, using Vanguard's Advisor's Alpha Framework.

Vanguard, a leader in the investment world, has identified seven key areas where advisors can make a real difference. Their research suggests that by implementing these strategies, advisors could potentially add about 3% to your annual returns. That might not sound like much, but over time, it can make a huge difference in your wealth.

The value-add of best practices in wealth management

Note 1: Value is deemed significant but too unique to each investor to quantify Note 2: Based on the mid-point value of the value range provided in the Vanguard research paper Source: "Putting a value on your value: Quantifying Vanguard Advisor's Alpha." Vanguard Research, July 2022. Kinniry, Francis M. Jr., Colleen M. Jaconetti, Michael A. DiJoseph, and Yan Zilbering.

Let's dive into these seven modules and see how each contributes to the overall potential value of financial advisor:

1. Suitable asset allocation using broadly diversified funds/ETFs (>0% added value) This is the foundation of your investment strategy. Your advisor helps you decide how to divide your money between stocks, bonds, and other investments using diversified funds or ETFs. While it's hard to put an exact number on how much this adds to your returns, it's crucial for managing risk and achieving your financial goals. To learn more about how the right asset allocation strategy can strengthen your financial future, check out our in-depth review on this topics: Asset Allocation: The Foundation of Your Financial Future

2. Cost-effective implementation (expense ratios) (0.30% added value) This is all about keeping more money in your pocket. Your advisor can help you choose investments with lower fees, which means more of your money stays invested and grows over time. Vanguard estimates this could add about 0.30% to your annual returns. It might not sound like much, but it adds up! To learn more about how the cost-effective implementation can strengthen your financial future, check out our in-depth review of this topic: Invisible Gains: How Low-Cost Investing Can Supercharge Your Wealth.

3. Rebalancing (0.14% added value) Markets go up and down, which can throw your perfect investment mix out of whack. Rebalancing means regularly adjusting your investments back to your target mix. It's like tuning up your car – it keeps everything running smoothly. Vanguard suggests this could add ~0.14% to your returns each year. To learn more about how rebalancing strategy can strengthen your financial future, check out our in-depth review of this topic: Rebalancing: The Unsung Hero of Your Investment Strategy.

4. Behavioral coaching (1.50% added value) This is the big one. When markets get crazy (and they will), it's tempting to make rash decisions. Your advisor acts as a voice of reason, helping you stick to your long-term plan instead of panic-selling or chasing the latest hot stock. Vanguard estimates this could add a whopping 1.50% to your annual returns. That's huge! To learn more about how behavioral coaching can strengthen your financial future, check out our in-depth review of this topic: Mind Over Market: How Behavioral Coaching Can Supercharge Your Investment Returns

5. Asset location (0.30% added value) This is about being smart with taxes. Your advisor can help you decide which investments should go into tax-advantaged accounts (like your 401(k) or IRA) and which should go into regular taxable accounts. It's a bit like a financial jigsaw puzzle, and getting it right could add another 0.30% to your returns. To learn more about how smart asset location strategy can strengthen your financial future, check out our in-depth review of this topic: Asset Location: The Tax-Savvy Way to Boost Your Investment Returns.

6. Spending strategy (withdrawal order) (0.60% added value) As you get closer to using your investments (maybe for a big purchase or in retirement), your advisor can help you figure out the best way to withdraw money. This smart "spending strategy" could add about 0.60% to your overall returns. To learn more about how optimized spending strategy can strengthen your financial future, check out our in-depth review of this topic: The Retirement Withdrawal Playbook: Maximizing Your Savings in the Golden Years.

7. Total return versus income investing (>0% added value) This is about looking at the big picture of your investments, not just the regular income they generate. While it's hard to put an exact number on how much this adds, it can make a big difference in how long your money lasts, especially in retirement. To learn more about how navigating the tradeoff between total return and dividend income investing can strengthen your financial future, check out our in-depth review of this topic: Beyond Dividends: Why Total Return Investing Trumps Income-Only Strategies.

Now, let's put it all together. Vanguard's research suggests that the total potential value added by implementing all these strategies could be around 3% in net returns. That's a significant boost to your investment performance!

It's important to note that the value added for some strategies (like asset allocation and total return versus income investing) is listed as ">0%". This means that while these strategies are considered valuable, their impact is too unique to each investor's situation to quantify precisely.

Also, keep in mind that the values for behavioral coaching, asset location, and spending strategy are based on the mid-point of a range provided in Vanguard's research. Your actual results may vary depending on your specific circumstances.

The Bottom Line

Working with a financial advisor isn't just about picking stocks or trying to "beat the market." It's about having a comprehensive strategy that maximizes your chances of reaching your financial goals. For young professionals like you, starting to work with an advisor early can give you a huge head start on building wealth.

By implementing these seven strategies, an advisor can potentially add significant value to your investments – about 3% annually according to Vanguard's research. Over time, this can translate into substantially more wealth for you. For a more comprehensive exploration of this topic, please read our in-depth blog post: The Hidden Value of Financial Advisors: More Than Just Investment Returns.

At Israilov Financial, we've developed our proprietary Guided Financial Mastery™ framework, which incorporates key principles from Vanguard's Advisor's Alpha, with a particular emphasis on behavioral guidance. Our approach goes beyond traditional financial planning, integrating behavioral coaching, strategic advice, and personalized guidance across all areas of your financial life.

If you're interested in learning more about how our Guided Financial Mastery™ framework can help you achieve your financial goals, we invite you to schedule a complimentary discovery meeting. During this session, we'll discuss your unique financial situation, goals, and how our firm can provide the guidance and expertise you need to make the most of your prime earning and investing years. We strive to potentially add significant value to your portfolio over time. If you're interested in learning how our comprehensive approach to wealth management can help optimize your financial future, schedule your free discovery meeting.

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Past performance is no guarantee of future returns

The graphs and charts in this commentary are for illustrative purposes only and not indicative of any actual investment. Index returns do not reflect any fees, expenses, or sales charges. It is not possible to invest directly in an index. Stocks are not guaranteed and have been more volatile than other asset classes. Historical returns were the result of certain market factors and events which may not be repeated in the future. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgement in determining whether investments are appropriate for clients.

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