I'm perrenially concerned about the true value of financial advice, and I often run across citations of a Vanguard white paper called "Putting a Value on Value: Quantifying Advisors' Alpha"; you can easily Google for it. This study defends the typical 1% AUM rate by claiming that a financial advisor can provide "about 3% in total potential value added," broken down like so:
Bps
> 0 Suitable asset allocation using broadly diversified funds/ETFs
40 Cost-effective implementation (expense ratios)
35 Rebalancing
150 Behavioral coaching
< 75 Asset location
< 110 Spending strategy (withdrawal order)
> 0 Total-return versus income investing
~ 3% Total potential value added, in net returns
Question: does anybody buy this breakdown? I just can't see it. For one thing, many of these purported value-adds are, at most, one-time deals, and shouldn't be used to offset the *annual* fee of an advisor. More significantly, fully half of this value is claimed to come from the category of “Behavioral Coaching”, or what I might call “saving clients from themselves”---that is, advising them to stay the course and avoid buying high because of irrational exuberance or selling low because of irrational panic.
Now, here’s the thing: I truly cannot imagine that I will get anything like 150 bps of value from this component of financial management. “Staying the course” seems to me to have been the very soul of my financial life so far. Still, I understand that retirement is a new stage in life and my relationship with money might well change when I start only spending it and not making it. In your experience, do people really end up needing very much of that “behavioral coaching”---anywhere near 150 bps/year worth, year in and year out?
Bps
> 0 Suitable asset allocation using broadly diversified funds/ETFs
40 Cost-effective implementation (expense ratios)
35 Rebalancing
150 Behavioral coaching
< 75 Asset location
< 110 Spending strategy (withdrawal order)
> 0 Total-return versus income investing
~ 3% Total potential value added, in net returns
Question: does anybody buy this breakdown? I just can't see it. For one thing, many of these purported value-adds are, at most, one-time deals, and shouldn't be used to offset the *annual* fee of an advisor. More significantly, fully half of this value is claimed to come from the category of “Behavioral Coaching”, or what I might call “saving clients from themselves”---that is, advising them to stay the course and avoid buying high because of irrational exuberance or selling low because of irrational panic.
Now, here’s the thing: I truly cannot imagine that I will get anything like 150 bps of value from this component of financial management. “Staying the course” seems to me to have been the very soul of my financial life so far. Still, I understand that retirement is a new stage in life and my relationship with money might well change when I start only spending it and not making it. In your experience, do people really end up needing very much of that “behavioral coaching”---anywhere near 150 bps/year worth, year in and year out?