Since our start in 1985, Mercer Advisors has firmly believed that investors have the most to gain by looking at their financial lives holistically – a mixture of investment advice, comprehensive planning, and life-driven goals. Recent research has put a value on this integrated approach.
Studies by Morningstar and Vanguard show financial advisers who provide wealth management best practices can add significant value beyond market performance. While the findings are hypothetical and are not actual investment results, both sets of research illustrate the value provided by comprehensive financial planning.
Our research shows that investors who follow best practices can earn an additional 1.50% to 3.00% annually. Splitting the difference between these statistics, Figure 1 shows how an additional 2.25% annual return could impact a portfolio over thirty years. (For illustrative purposes only.)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The average investment portfolio return has an assumed average annual return of 6% compounded monthly. The return attributed to financial planning has an assumed average annual return of 2.25% compounded monthly.
Morningstar says smart financial planning can translate to 1.5% more in annual average returns. Academics at Morningstar recently coined the term Gamma to define the potential valued added to a portfolio from intelligent financial decisions. In a white paper titled Alpha, Beta and Now….Gamma the authors stated, “Getting Gamma from financial planning best practices offers a much more certain and consistent return than seeking traditional alpha from choosing outperforming mutual funds.” Morningstar identified more than 100 financial planning techniques that can serve as sources of Gamma. They focused on five for their study: total wealth asset allocation, annuity allocation, dynamic withdrawal strategy, liability relative optimization, and asset location & withdrawal sourcing.
Figure 2 shows how properly implementing these value-added strategies can increase returns by as much as 1.59% annually. Of the five strategies, a dynamic withdrawal strategy had the highest potential Gamma. In addition to the five factors, Morningstar found that making informed Social Security claiming decisions could increase returns by another 0.74% annually.
Vanguard finds working with an adviser can add up to 3% in net returns. Vanguard performed a similar study and concluded that financial advisers using wealth management best practices can add “about 3% in net returns” to their clients’ portfolios. Vanguard emphasized that while the value added will vary according to each client’s circumstances and from year to year, “It’s a number that is very real and can reinforce the importance of sticking to a plan and following sound financial advice.”
As detailed in Figure 3, clients can benefit from a qualified adviser who helps them invest in a low-cost, broadly diversified portfolio, maintain their target allocation, and draw down their savings tax efficiently. Successfully implementing all seven strategies can potentially add “about 3%” to an average client experience.
Notably, research finds that advisers can add the most value – “tens of percentage points of value-add, rather than mere basis points” – by helping clients stay the course during bear market lows and avoid performance chasing during market highs.
Best Practices at a Glance
Below are five strategies identified by this new area of best practices research. All of these potential return-enhancing strategies are practiced by Mercer Advisors:
Academic Portfolio Design
Research has found that asset allocation is the biggest driver of a portfolio’s return and risk. Best practice studies conclude that one of the advisor’s primarily responsibilities is to design a properly diversified investment portfolio tailored to each client’s personal needs, goals, and risk profile.
Ongoing Personal Guidance
Studies have shown that average investors often jump in and out of the market, buying at the euphoric highs and panic selling at the distressing lows. Not surprisingly, the returns the average investors earn on their investment portfolios are significantly lower than what the market offered. One of the most valuable services an advisor can provide is to help clients steer clear of money-losing ventures, like trying to time the market or chase returns.
Low-Cost Investing
Research has repeatedly documented that low costs lead to better investment performance. Advisers who implement investment plans with lower-cost funds can add significant value to their clients’ portfolios. Cost-effective implementation is especially important in times of low market returns, when fund expenses erode a higher proportion of returns.
Systematic Portfolio Rebalancing
A good financial adviser keeps the investment plan on track through systematic portfolio rebalancing. Regular rebalancing keeps positions within their target weights and enforces the discipline of buying low and selling high. Without guidance, many investors fail to rebalance their portfolios because it seems counterintuitive to sell winners and buy laggards.
Customized Distribution Planning
Research has shown the benefits of adjusting distributions based on the investment climate and a client’s remaining life expectancy. Advisers utilizing variable withdrawals strategies can help maximize how long their clients’ savings last. Customized distribution planning allows investors to increase spending during good markets, without having to cut back as much in down markets.
David has served as CEO of Mercer Advisors since 2008. He is responsible for the firm’s strategic vision, business plan execution, and organizational structure.
-
Would You Benefit From Investing in Cryptocurrency?Understanding the complexity of adding digital currency to your investments is critical, especially since drastic price changes can happen very quickly.
-
Why Company Stock May Be Riskier Than Employees RealizeStock compensation has its perks, but employees must be realistic (and unemotional) about their investments' prospects. Sometimes strategic sales are smart.
-
Can You Be Fired for Going to Work When You're Contagious?What's an employer to do when an employee shows up at the office with a cold or the flu and spreads germs to co-workers?
-
Social Security Fairness Act: Five Financial Planning Issues to RevisitMore money as a public-sector retiree is great, but there could be unintended consequences with taxes, Medicare and more if you're not careful.
-
Social Security Warning: Five Missteps Too Many Women MakeClaiming Social Security is complicated, and for women the stakes are high. What you don't know can cost you, so make sure you do know these five things.
-
To Buck the Third-Generation Curse, Focus on the Family StoryThe key is to motivate the next generations to contribute to the family business in a productive way. You can look to Lawrence Welk's family as a prime example.
-
How Roth Accounts Can Ease Your Tax Burden in RetirementStrategic Roth IRA conversions can set you up for tax-free income in retirement and a tax-free inheritance for the people you love.
-
Are You a High Earner But Still Broke? Five Fixes for ThatIf you're a HENRY (a higher earner, not rich yet) but feel like you still live paycheck to paycheck, there are steps you can take to get control of your financial future.
