Advisors add 2.88% in value, study finds

Activities like rebalancing and behavioural coaching can generate additional returns, finds Russell Investments

• By: advisor.ca
• May 7, 2020

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A study from Toronto-based Russell Investments Canada Ltd. has found that financial advisors deliver value at a level almost triple the typical advisory fee of 1%.

The firm’s fifth-annual Value of an Advisor study pegged the value of an advisor who performs comprehensive wealth management at 2.88% in 2020. This is up from 2.79% in 2019.

“We believe advisors have never been more valuable than in the midst of Covid-19-related market turbulence and economic hardships,” said Brad Jung, Russell’s head of North America Advisor & Intermediary Solutions, in a release.

The study arrived at the 2.88% figure by calculating the additional returns a human advisor generates across three categories — annual rebalancing of investment portfolios (10 basis points), correcting behavioural mistakes such as overconfidence and herding (100 basis points), and tax-efficient investing (66 basis points) — and by adding the typical fees charged for basic investment management (40 basis points) and financial planning and answering questions (72 basis points).

In addition to the 2.88%, Russell’s research found that regular rebalancing could potentially reduce portfolio volatility by 80 basis points.

In 2014, the Vanguard Group released a study called Putting a Value on Your Value: Quantifying Vanguard Advisor Alpha that calculated an advisor’s value-add at “about 3%.” In a 2018 Canadian version of the study, Vanguard found that behavioural coaching added 150 basis points in value; wealth management, 42 to 88 (with rebalancing valued at 42 basis points alone); and portfolio construction, 86 to 128.