Should you invest with a financial adviser? (Here's what the research says)
I might not be the sharpest knife in the drawer.
But back when I had hair, I never wandered into a barbershop to ask, “Excuse me, sir. Do you think I need a haircut?”
I can’t kid myself.
I would have walked out with a buzz.
In much the same vein, don’t ask a financial adviser if they think you need them. For starters, some financial advisers work like barbers with machetes. The UAE, for example, is filled with hacks that sell these things.
Other advisers will build you portfolios of actively managed funds. With the best of intentions, they’ll follow economic news and shift your money around like someone mixing a deck of cards. But based on the tracked performances of more than 4,000 financial advisers, they underperform a portfolio of index funds by about 3 percent per year.
But what if you work with someone who builds diversified portfolios of index funds, believes market timing is for suckers, convinces you to manage your household budget, helps with tax-related hurdles and works to align your financial goals?
Vanguard’s research says such an adviser could benefit the client by more than 3 percent per year.
But is Vanguard just a barber recommending a haircut every week?
You might say otherwise, if you know how Vanguard works.
Vanguard’s founder, John Bogle, started the first retail index fund. The firm operates much like a non-profit. Technically, it’s a co-op. Every investor in Vanguard’s products owns of sliver of the business. That means, no matter how much hair they cut, nobody at Vanguard will turn into Richard Branson.
The firm is also Mecca for do-it-yourself investors. But they have financial advisers, too. After researching their DIY clients and their clients who use advisers they claimed that advisers add value to investors’ bottom lines.
Below, I’ve listed a five-point benefit breakdown:
- Cost effective implementation
- Effective rebalancing
- Behavioural coaching
- Asset allocation
- Spending strategy
Cost effective implementation (benefit up to 0.3% per year)
This refers to choosing low-cost funds, reducing purchase transactions and investing in a manner that reduces taxable consequences. Vanguard’s research is from US-based investors, but the firm says this applies to overseas investors too. In fact, investors repatriating to the UK from a tax-free jurisdiction (such as the UAE) might be able to double or triple Vanguard’s estimate, based on how intelligently an adviser can repatriate their assets. I explain here.
Effective rebalancing (benefit up to 0.14% per year)
You might think Vanguard misleads investors when suggesting that rebalancing provides a wealth benefit. After all, if someone chooses an allocation that’s 60 percent in stocks and 40 percent in bonds, they’ll make more money over time if they never rebalance it. That’s because the portfolio would gradually shift to a higher allocation of stocks.
But Vanguard’s point is that by maintaining a target allocation, investors are more likely to stay calm when stocks drop. As I mentioned in this article, how an allocation performs, and how investors perform with that specific allocation, are typically two different things.
Behavioural coaching (benefit up to 2% per year)
Every time an investor turns on the television, goes online, listens to market-based news or hears a colleague boasting about his big gains, the investor is at risk. When DIY investors hear such noise, they can react to it quickly. But investors with the right kind of financial adviser have a guardian at their gate.
That doesn’t mean the adviser will get the investor in a headlock, wrestle them to the ground and smack them with common sense. But when investors must speak to an advisor before making an investment change, there’s an opportunity for help. The adviser could convince them to back away from the cliffs of speculation.
Asset allocation (up to 0.6% per year)
This refers to how investments are divided into taxable and tax-advantaged accounts. Expats in the UAE don’t need to worry about this, until they repatriate. But once they do, they’re often fresh meat for the taxman if they don’t have savvy help.
Spending strategy (up to 1.2% per year)
You’ve likely heard of the 4 percent rule. This is how much retirees can afford to sell each year, while giving them solid odds that they won’t run out of money. But how could you make this flexible, during market down years? And could you withdraw more?
Then there’s the question of what to sell, and when. If you’ve retired to a taxable jurisdiction, should you sell assets from your tax-advantaged accounts first? Vanguard says there’s an advantage to hiring a pro. And they might be right.
Vanguard, however, isn’t saying everyone needs a financial adviser. This depends on you, what you’re willing to learn and how you can manage your emotions.
And for the record, I can’t really tell whether you need a haircut or not.