By: Todd Hall
Multiple studies have shown that investors who seek the help of financial advisors often outperform their peers who choose to do it themselves. Below is a brief review of two studies that examined the benefits advisors bring to their clients.
One study by Aon Hewitt compared “do it yourself” investors to investors who were receiving some sort of guidance or help managing their investments. The study looked at a 10-year period that included the financial crisis of 2008 and the broader period of the late 2000s that is often referred to now as The Great Recession. They found that those who sought the advice of a financial advisor outperformed those who did not by 1.86% annually. Importantly, this difference was measured on a “net of fee” basis. The impact of financial advice became even more pronounced during the worst years of market turmoil. In 2009 and 2010 those who were relying on a financial advisor outperformed their “do it yourself” peers by 2.92% net of fees.
Another study that showed similar results was done by Vanguard. The Vanguard study called “Advisor Alpha” showed that investors with advisors outperformed their peers by 3% per year. The Vanguard study also sought to identify the reasons why. This study found that at least 50% of the difference in performance (or 1.5% per year, net of fees) can be explained by what they termed “behavioral coaching.” In other words, half of the increased performance had to do with investor behavior and not with investment selection.
These studies show that advisors can (and on average do) add substantial value net of fees. More importantly, though, these studies also show that much of this added value comes from helping clients take the emotions out of their financial decision making. Investors’ long term success often depends on the ability to take two dangerous emotions out of the picture: fear and greed. Think back to what it felt like during the financial crisis of 2008. There was a tremendous amount of fear. A decade before that, we had the “dot-com” boom during which investors kept seeing others around them getting rich from tech stocks, and there was a real fear of missing out. More recently we saw this on a smaller scale with Bitcoin.
History shows that it is most important to remove emotions like fear and greed at the very times when it is most difficult to do so. The research is clear that advisors help investors keep their emotions in check and their financial plans on track.
Vanguard Study: https://personal.vanguard.com/pdf/ISGAA.pdf