Studies Show Higher Net Returns When You Work with a Financial Advisor

In the complex and ever-evolving world of personal finance, the guidance of a knowledgeable financial advisor can be invaluable. While some people may question the need for professional assistance, numerous studies have consistently shown that individuals who work with financial advisors tend to achieve higher net returns compared to those who go it alone.

Often, it’s not about investment selection or portfolios; it is about having an advisor design, implement and execute a personal financial plan for you. A qualified advisor can help you minimize taxes and avoid mistakes.

In this blog post, we explore the findings of three prominent studies that underscore the tangible benefits of partnering with a financial advisor.

Study 1: Vanguard’s “Advisor Alpha^®”

Vanguard, one of the world’s largest investment management companies, conducted a groundbreaking study titled “Advisor’s Alpha^®.” The study aimed to quantify the value that financial advisors bring to their clients beyond just investment management.

The study explains how financial advisors can add value, or alpha, through relationship-based services such as financial planning, discipline and guidance, rather than by trying to outperform the market.

For example, one way advisors provide value to clients is by encouraging them to follow their customized financial plans and “staying the course” instead of making emotional knee-jerk reactions when the markets fluctuate.

Vanguard found that, on average, financial advisors can add about 3 percent in net returns for their clients annually through various means such as behavioral coaching, asset allocation, cost-effective investment selection and tax efficiency strategies. This is just an estimation; the actual amount of value that advisors add to their clients’ portfolios may vary significantly, depending on the circumstances.

Study 2: Russell Investments’ “Value of an Advisor”

In 2013, Russell Investments conducted a comprehensive study titled “Value of an Advisor” to assess the impact of financial advisors on investment outcomes. The study analyzed 25 years of historical data and concluded that individuals who worked with financial advisors accumulated, on average, 1.5 percent more in assets over that period compared to those who did not seek professional advice.

This outperformance was attributed to factors such as goal setting, financial planning, investment selection, and ongoing guidance during market fluctuations.

Russell Investments conducted the study again 10 years later, in 2023, and summarized the value of financial advisors. The 2023 Value of an Advisor formula is A + B + C + T. Those letters stand for active rebalancing of investment portfolios, behavioral coaching, customized experience and family wealth planning, and tax-smart planning and investing — the four components of financial guidance that Russell concludes are most valuable to investors.

Study 3: Morningstar’s “Alpha, Beta, and Now…Gamma”

Morningstar, a leading provider of investment research, introduced the concept of “Gamma” to quantify the value of financial planning and advice.

In its study titled “Alpha, Beta, and Now…Gamma,” Morningstar identified various areas where financial advisors add value, including asset allocation, tax-efficient withdrawal strategies in retirement and behavioral coaching to prevent investors from making emotionally driven decisions during market downturns.

The study’s authors defined alpha as “the residual or skill component — a zero sum game in the aggregate (after fees)”; beta as “the market/asset allocation exposures of a portfolio — equity allocation of the portfolio and underlying asset class exposures”; and gamma as “the additional value achieved from making more intelligent financial planning decisions — a non-zero-sum game.”

This older study, published in 2013, suggested that effective financial planning and advice can lead to additional retirement income of up to 1.59 percent per year.

Why Do Advisors Add Value?

The findings of these studies highlight several key reasons why working with a financial advisor can lead to higher net returns:

• Behavioral coaching: Financial advisors help clients stay disciplined and avoid making emotional decisions that can undermine their long-term financial goals, especially during periods of market volatility.
• Asset allocation: Advisors assist clients in constructing well-diversified portfolios tailored to their risk tolerance, time horizon and financial objectives, optimizing returns while managing risk.
• Tax efficiency: Advisors employ tax-efficient investment strategies to minimize the impact of taxes on investment returns, maximizing after-tax wealth accumulation over time.
• Financial planning: Advisors provide comprehensive financial planning services, including retirement planning, estate planning, insurance analysis and education planning, ensuring that you have a road map for achieving your financial aspirations.

Conclusion: Partnering for Success

The evidence is clear: working with a financial advisor can significantly enhance your financial outcomes and lead to higher net returns over the long term. By leveraging their expertise, guidance and holistic approach to financial planning, advisors help you navigate the complexities of the financial markets, stay focused on your goals and ultimately achieve greater financial confidence.

At Carver Financial Services, we use our proprietary Personal Vision Planning^® process to guide you toward financial well-being over the long term. This all-encompassing, four-step approach ensures we lay the groundwork for a strong and successful investment strategy.

While other firms focus on investments and the markets, we focus on guiding you toward your personal vision of your best future. This process is a partnership with you. Our team will help you define the goals that are important to you, develop and help you implement a plan, and then monitor your progress and adjust your plan as needed over time. We will guide you to achieve your goals in a manner that is consistent with your risk tolerance, needs and vision.

When it comes to planning your financial future, we believe the value of professional advice cannot be overstated.

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Any opinions are those of Randy Carver and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The results in the studies described are hypothetical in nature and not actual investment results or guarantees of future results.