Did you know that financial advice adds 3% a year to your investment returns?
According to a new study in the US by The Vanguard Group Inc., there are five things advisers do which combined add three percentage points to the net investment returns of their clients.
Here are the five ways in which financial advice adds 3% a year.
The first way in which financial advice adds value is through behavioural finance, keeping investors focused on long-term goals and helping them stick to a regular investing plan.
According to Vanguard, this first element can add 1.5% a year to net investment returns.
Financial advice helps investors avoid the temptation of trying to time the markets or chase performance.
As behavioural coaches, Vanguard explains that financial advisers “can act as emotional circuit breakers by circumventing clients’ tendencies to chase returns or run for cover in emotionally charged markets.”
The second way in which financial advice adds up to 3% a year is through considered allocation of assets between taxable and tax-advantaged accounts.
This contributes a further 0.75% a year to net investment returns.
Keeping the costs of investing down is the third way in which financial advice adds value, contributing 0.45% a year to net returns.
Another way in which financial advice adds 3% a year to net investment returns through regular portfolio rebalancing.
This aims to keep the underlying asset allocation of an investment portfolio constant over time, in line with the chosen risk profile of the portfolio.
Regular rebalancing along can contribute up to 0.35% a year to net investment returns.
Finally, financial advice can add about 0.7% a year to net investment returns by helping investors understand the best way to spend their assets, specifically the order in which they withdraw assets in retirement.
The value of advice on an asset withdrawal strategy was calculated by Vanguard to be greatest “when the taxable and tax-advantaged accounts are roughly equal in size and the investor is in a high marginal tax bracket,”
All of this means financial advice adds 3% a year to net investment returns; not the total of the maximum impact stated for each practice, but the total average impact each of these changes would have on investment results.
According to the report authors, financial advice tends to add the most value during periods of “market distress or euphoria” as these tempt investors to change their investment strategies.
The report concludes that financial advice adds 3% a year to net investment returns, but this should be considered as an intermittent rather than annual addition to investment returns.
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