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How Much Is Quality Financial Advice Worth?

How Much is Quality Financial Advice Worth?

Bob Barker made a career of helping people assess the value of consumer products on the TV game show “The Price is Right.” When you look carefully, you see that quantifying value can be an interesting—and quite elusive—pastime. It’s no wonder “The Price is Right” is one of the longest-running television series of all time.

However, it’s one thing to sort out the value of a new home entertainment system or fully loaded vehicle, as “Price is Right” players must do. It’s much more difficult for consumers of financial advice to determine the value of that information, compared to the worth of tangible products.

Vanguard, Come on Down!

In March 2014, the investment management company Vanguard published a white paper that seeks to quantify the value of financial advice. The firm uses an interesting methodology in attempting to quantify value: It breaks down financial advice into seven different “modules.” By estimating the added value of each module and summing up the total, Vanguard estimates that the value of financial advice given to customers is about 3% per year.

Interestingly, RegentAtlantic has been employing these “advice modules” for clients for well over a decade. We believe that we have also demonstrated thought leadership in some of these areas through academic papers and software development. As big proponents of educating customers about their financial choices, we applaud Vanguard in its attempt to actually quantify the value of professional advice.

Below is a synopsis of the Vanguard white paper findings. For more detail:

https://advisors.vanguard.com/iwe/pdf/ISGQVAA.pdf?cbdForceDomain=true

Vanguard quantifies the value-add of best practices in wealth management 

vanguard blog chart

Let’s explore each of the modules in more detail and see how RegentAtlantic looks to employ best practices within each area.

Asset allocation using broadly diversified funds/ETFs

RegentAtlantic employs 13 different asset classes that include fixed-income vehicles, equities, and other alternatives. Most of those allocations are implemented using mutual funds or ETFs. We believe there are some asset classes that are better implemented using individual bonds or stocks. For example, using individuals stocks in the global large-stock asset class may improve tax efficiency and reduce expense.

Cost-effective implementation (expense ratios) 

Fees associated with underlying investments are very important. Lower fees at the investment level, of course, allow customers to retain a higher percentage of their overall assets rather than losing them to sales costs. RegentAtlantic seeks to reduce the costs of investments by utilizing institutional-class mutual funds and lower-cost alternatives when possible. Expense ratio is not the only selection criteria we use when choosing the best funds for our customers, but it is an important component of our process.

Rebalancing 

In 2004, after years of time-consuming quarterly rebalancing, RegentAtlantic began searching for a “better way.” There were no tools on the market that would allow us to monitor client portfolios for rebalancing on an almost- daily basis. Our strategy: We built our own system from the ground up. In coordination with two other advisory firms, RegentAtlantic created iRebal®, what we called “the intelligent rebalancer.” We subsequently sold the company to TD Ameritrade and now more than 80 advisory firms use this groundbreaking technology. http://www.tdainstitutional.com/lp/irebal.page

Behavioral coaching

Investing can create an emotional roller coaster for customers. Both fear and greed can run rampant and derail even the most sound investing strategy. According to Vanguard, this is where advisors can add the most value: By coaching clients to maintain a long-term perspective. Vanguard analyzed 58,168 self-directed Vanguard IRA accountholders to estimate the 1.5% value-ad of this module. RegentAtlantic agrees with Vanguard that integrating financial planning with ongoing investment management gives us the best likelihood of helping keep clients on course.

Asset location

The allocation of assets between taxable and tax-advantaged accounts can add value fairly quickly. RegentAtlantic wrote a book on asset location in 2005: Asset Location: A Generic Framework for Maximizing After-Tax Wealth by Gobind Daryanani and Chris Cordaro. We have since expanded asset location to include the potential advantages to estate-tax as well as income-tax planning. (Please note that Daryanani is a former employee of RegentAtlantic. Accordingly, the research has not been prepared by an independent third party)

Spending strategy (withdrawal order)

Clients approaching retirement may have many accounts with different tax characteristics: Taxable accounts, tax-deferred accounts like IRAs, and tax-free accounts like Roth IRAs. A clear strategy on when to spend each of these accounts in retirement can help to significantly reduce clients’ tax burdens. Through its ongoing financial planning, RegentAtlantic advises clients on spending strategies for retirement.

Total-return versus income investing

Retirees need cash flow—not income—from their portfolios in retirement. As such, an investment strategy based on total return, instead of the income generated by each investment, should lead to superior portfolio construction. Constraining asset allocation by forcing a portfolio to generate enough income to sustain cash-flow needs forces the individual investor to buy more bonds in the kind of low interest-rate environment we are experiencing today. That approach could prove quite dangerous. Instead, RegentAtlantic employs a more expansive, total-return strategy in constructing portfolios for clients.

In conclusion, we congratulate Vanguard on their efforts to estimate the value of financial advice to customers. This isn’t an easy task: It is difficult to estimate the true added value of financial advice when every client and market environment is unique. However, one benefit not listed in Vanguard’s white paper was the time savings associated with access to quality financial advice. Imagine how much more time educated customers could spend with family and friends instead of poring over tax codes and journals. The value there: Priceless!

 

 

Important Disclosure Information
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable. Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request. This article is not a substitute for personalized advice from RegentAtlantic. This information is current only as of the date on

which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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