Value of an Advisor Study 2024: 4 key ways investors benefit

Executive summary:

  • Financial advisors provide a variety of key services to investors as part of their holistic wealth management offering
  • These services help guide investors through the many phases of their lives and of the markets.
  • Each provides significant value to investors as quantified in our annual Value of An Advisor study.

Life is full of surprises. If you don’t have a crystal ball, you can’t really predict what may come next in your life—or in the markets. That’s why we should always be prepared for any potential situation.

Most of us will follow a pretty standard path in life: we’re likely going to navigate careers, relationships, and major financial events (like having children or buying a home) until we get to an age where we then enjoy the fruits of our labors. Of course, all of us will face an obstacle or two along the way. I know I have!

It’s a different story for the markets. They do tend to go higher over time, but their path is not always clear. There are any number of events or situations that affect them. Just consider the past few years in which the markets have been buffeted by wars, a global pandemic, corporate bankruptcies, surging inflation, or the emergence of accessible artificial intelligence. We can never predict what may be on the horizon. And this year, in which more than half of the global population1 is going to elect new leaders, the potential for volatility is significant.

At Russell Investments, we believe advisors are never more important than during periods of the unknown – which, frankly, is all the time! We truly can never know what may come next in our lives or the markets.

We believe that advisors play a critical role in steering investors through the various market environments they may encounter over their lives – and through the various major life events they undergo.

For the past 11 years now, we’ve looked at the variety of services that an advisor typically provides and estimated the value they represent. And year over year, our Value of an Advisor study has indisputably shown that an advisor who delivers holistic wealth management services provides value that far exceeds the typical fee charged.

The services that we believe provide the most value to investors make up our Value of an Advisor formula:

(Click image to enlarge)
VOA

A is for active rebalancing and asset allocation

Rebalancing is one of those services that no one talks about very much. I think that’s because it’s frequently automated and therefore easy to take for granted.

But the point is that investors who don’t work with a financial advisor are unlikely to conduct rebalancing on their own. Why do I say that? Well, what IS rebalancing? It’s buying more of what has just hurt a portfolio and selling what’s done well. How many investors do you think are willing to sell their top-performing names and buy more of the stocks that have dragged down their portfolio? And yet that is the basic principle of successful investing: buying low and selling high.

This is why we believe the advisor’s role is vital. A portfolio that is regularly rebalanced is more likely to remain close to its original asset allocation—and keep the investor within their risk comfort zone. An investor who remains in their risk comfort zone is likely to remain invested – and not on the phone to you, the advisor, wanting to move their savings out of the markets.

Rebalancing can also help ensure true diversification is still in place. A few key technology names have dominated the U.S. stock market – and U.S. equity returns – over the past few years. Without regular rebalancing, an investor’s portfolio could have become heavily weighted in large-cap U.S. tech stocks, potentially creating an overweight of risk if that single sector were to drop.

B is for behavioral coaching

We all know that investors are ruled by their emotions. Advisors often find that they are busiest when markets are volatile. Many investors may also question their advisors about investments they’ve heard about from the internet or in the media – or from friends. And some investors get nervous when their quarterly statement shows a loss, or their favorite stock tanks.

Keeping investors from following their hearts and not their heads is one of the most important roles an advisor plays. Without you, the advisor, your clients are more likely to pull out of markets when they become volatile, follow the herd on a popular investment, or buy at the market peak and sell at the bottom, among other well-known behavioral mistakes.

Investors who are left to their own devices are often prone to chase performance. Similarly, investors are prone to vote with their feet when markets get difficult. This is why an advisor’s role as a behavior coach is so valuable.

Markets can be unpredictable. But their long-term trend has been up. Remember that the S&P 500 Index has finished the year in positive territory 74% of the time since its inception in 1926 2 . Investors who are guided by advisors—and stick to their plans—are likely to benefit.

C is for customized family wealth management

Advisors not only guide investors through volatile markets, they guide them through their life changes. We can all agree that our society has become more complicated and so have our lives. This in turn has caused many advisors to broaden and deepen the services they provide.

An advisor can now offer an array of services, encompassing everything from insurance needs, custom requests, legacy, and charitable planning, setting up family trusts, and ensuring investors’ portfolios are aligned to their values.

Just as every family is different, every investment plan is different. Every person has different goals, circumstances and preferences – all of which can evolve across their lifecycle. Advisors may now conduct an ongoing process of discovery with clients to ensure their unique investments plans continue to align with each stage in the client’s life.

The extra services and deeper discovery conversations, the expanded planning and coordinating are time-consuming. Personalized services are quite different from basic financial plans and we believe they provide substantial value to investors.

T is for tax-smart investing

Taxes can be complicated and confusing. Even the most seasoned investors – and advisors – may not fully understand how taxes on investments work.

It’s fairly straightforward to see the tax consequences related to capital gain distributions, dividends, and interest. These are identified in the tax forms investors receive every year. But it may be difficult to see how each investment and implementation decision can create tax liabilities in an investor’s portfolio. Activities such as asset allocation changes, fund changes, rebalancing, and trading can all have tax consequences.

This “tax drag” can reduce a portfolio’s returns. Reducing the amount of tax drag in a portfolio can help the investor keep more in their pockets and less in Uncle Sam’s. This is why we believe that advisors who incorporate tax management as an integral part of the investment process can add substantial value.

Another thing to bear in mind is that the Tax Cuts and Jobs Act of 2017 is expected to sunset in 2025. The ending of some of its specific provisions could raise certain tax bills. That makes it more important than ever to use a tax-managed approach to investing, it can potentially provide significant value to investors and help tax-savvy advisors stand out from their peers.

The bottom line: Communicate your value

Investors who work with a financial advisor are more likely to remain on track with their financial goals during all the phases of their lives and of the markets. And you, the advisor, should let them know that. Let them know that the services you provide can help smooth their investment journey, keep them from acting against their own best interests, and reduce their tax liabilities. That the deep discovery conversations you have mean their investment plan is uniquely designed for their needs, goals and circumstances.

We believe that when investors understand everything you bring to the table, they will remain engaged with their investments, but also with you. They are likely to view you as a valuable guide and trusted counsel. And they will see the value you bring to them.


1 Source: https://www.economistgroup.com/group-news/the-economist/2024-will-put-a-spotlight-on-the-global-state-of-democracy-as-more-people

2 Source: Russell Investments. Morningstar