Think your broker is worthless? You might want to think again based on Vanguard’s ongoing research on what your broker actually brings to the table.
George Burwell, CFA, of Coastline Trust Company recently touched upon’s Vanguard’s study dating back to 2001 that shows how that a money manager might actually be worth the price. Well, the right money manager is worth the price.
Vanguard, the disciple of low-cost passive investing, created their Advisor’s Alpha in 2001, where they outline how an advisor can add value through relationship-oriented services such as financial planning, discipline, and guidance instead of trying to outperform markets. In other words, an advisor can be the voice of reason when the going gets rough, ultimately saving you money!
Vanguard claims that over time, you should be able to pick up another 3% total on your investments per year over the long-term if your advisor provides these value-added services. Below is the breakdown of what working with ad avisor can do for you:
1. ASSET ALLOCATION ADDED VALUE = HIGH RETURN BUT NOT MEASURABLE
There are several asset allocations, depending on your stage in life and objectives. However, by choosing the correct mix between stocks and bonds based on careful analysis, your investment manager can save a client from portfolio demise given a market correction when funds are needed most.
2. COST-EFFECTIVE IMPLEMENTATION = +0.45% IN ADDED VALUE
By carefully choosing low-cost investments with low expense ratios with low turnover (giving you a low tax bill), your advisor tacks on a little extra return year after year. Commissions are also knocked down by sticking with long-term investments.
3. REBALANCING = + 0.35% IN ADDED VALUE
What does the average investor do when the stock market tanks? He or she rarely buys more stocks up to their long-term allocation. Your advisor will provide that rebalancing discipline when it gets really painful.
4. BEHAVIORAL COACHING = + 1.5% IN ADDED VALUE
An advisor’s job is also to keep you on target with your original plan. I knew of several investors who got out of the stock market during the financial crises and subsequent market drop only to stay on the sidelines and no get back in against my advice. They watched the market double from there while they sat in cash.
5. ASSET ALLOCATION = +0.37% IN ADDED VALUE
If you have a retirement account, which is tax deferred and a non-retirement account which is taxable, placing your high yielding assets in your IRA and your low-yielding assets in your taxable account will save you on your tax bill. Your advisor can create a plan to allocate your assets properly.
6. WITHDRAWAL ORDER FROM PORTFOLIOS = +0.35% IN ADDED VALUE
When you need cash out of your investments, where you take it from has some bearing on your overall return. A good advisor will plan your withdrawals carefully.
7. TOTAL-RETURN VS. INCOME HARVESTING = SIGNIFICANT, NOT MEASURABLE
Just because your AT&T stock has a huge dividend doesn’t mean that it is keeping up with the broad market. A good manager will invest for total return and not just income.
All this amounts to the theory that, even though you may be using ETF’s or index funds, using a good money manager can add value over time. According to Vanguard, this added return can reach 3%, much higher than the average CD rate today. Ask your advisor how he is getting that 3% for your today.