A sharper focus on the value of advisors.

A is for Active rebalancing of investment portfolios

Without regular rebalancing, a client’s portfolio could become overly heavy in large capitalization U.S. equities.

Over longer periods of time, this sort of shift can meaningfully change the risk and return potential of a portfolio. For example, if an investor had purchased a hypothetical balanced portfolio of 60% equities and 40% fixed income in January 2009 and it had not been actively rebalanced since then, by the end of 2020, the risk profile of the portfolio would look very different. That original balanced portfolio would have become a growth portfolio, with 80% invested in equities and only 20% in fixed income. That would expose the investor to risk they didn’t agree to and could be a concern if equity markets suddenly reversed, as we saw in early 2020.

When balanced becomes the new growth

The potential result of an un-balanced portfolio

Source: Hypothetical analysis provided in the chart & table above is for illustrative purposes only. Not intended to represent any actual investment. Source for both chart & table: U.S. Large Cap Growth: Russell 1000 Growth Index, U.S. Large Cap Value: Russell 1000 Value Index, U.S. Small Cap: Russell 2000^® Index, International Developed Equities: MSCI World ex USA Index, Emerging Markets Equity: MSCI Emerging Markets Index; Global Real Estate: FTSE EPRA NAREIT Developed Index, and Fixed Income: Bloomberg U.S. Aggregate Bond Index.

B is for Behavioral coaching

Many investors in 2020 were tempted to flee for the exit in mid-March when the S&P 500^® Index fell by 33.8%. This is where the value from an advisor's behavioral guidance really comes into focus. Investors who remained invested would have seen the index rebound 17.6% in the following three days, and then not only fully recover, but actually return 18% by the end of the year.

As the following graph shows, missing out on even a few days of good performance can have a detrimental effect on a portfolio. And how do you know which days those will be? That’s the catch—you don’t. Markets can be unpredictable. But their long-term trend has been up. In fact, the S&P 500 Index has finished the year in positive territory 74% of the time since its inception in 1926.¹ Investors who are guided by advisors—and stick to their plans—are likely to benefit. Doing nothing can often be the better choice.

The investment impact of missing best market days

10 years ending December 31, 2020

Source: Morningstar. In USD. Returns based on S&P 500 Index, for 10-year period ending December 31, 2020. For illustrative purposes only. Index returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Indexes are unmanaged and cannot be invested in directly.

¹ Source: Russell Investments, represented by the S&P 500 Index from 1926-2020

C is for Customized client experience & planning

If someone wanted a cookie-cutter, one-size-fits-all investing experience—at very little cost—they could use a robo-advisor. But a robo-advisor generally doesn’t provide a financial plan, ongoing service, or guidance; just the option for an investor to choose from a pre-selected list of funds, provide annual statements and a phone number to call in case of questions. This would be fine if all investors are alike.

Each investor has their own set of goals, circumstances, and preferences. And that is why we believe the customized client experience that an advisor can offer has significant value. At one time, an advisor was essentially a broker—selecting investments for clients. Now, most advisors are expected to provide holistic wealth advice for entire families. Indeed, between 2017 and the end of 2020, there has been a 39% increase in advisors providing comprehensive planning services².

We have found that the value that advisors deliver through the customized experience is much higher than the cost of an automated service and cookie-cutter plan from a robo-advisor.

² https://www.envestnet.com/press/envestnet-moneyguides-latest-advisor-survey-finds-financial-planning-services-fees-rise

P is for Product alignment

If every investor has their own goals, circumstances, and preferences, then it stands to reason that each will require a different mix of products. But how can an advisor provide that customized client experience when there is only an average of 2,000 work hours in a year? That’s based on 40 hours a week over 50 weeks. And that’s not accounting for illnesses, additional vacation, conferences, meetings and other events that can take a bite out of the time an advisor has available. Impossible, right? Besides, we’ve already discovered that investors value advisors for their personalized service and want more frequent communication. So it makes sense for advisors to provide the wealth management services and outsource the stock picking. This is where the use of models can really help free up an advisor’s time while still ensuring each of their clients gets the customized client experience they value.

Hypothetical scenario for illustrative purposes only.

T is for Tax-smart planning & investing

Why should we be concerned about tax management? Because taxes can have a significant impact on returns. Our research has shown that investors lost an average of 1.74% of their return from non-tax managed U.S. equity products in each of the five years ending December 31, 2020. That’s larger than the total fee most advisors charge.

More importantly, over time, that kind of tax drag can add up. For example, a $500,000 investment that lost 1.74% annually to taxes would only be worth $875,000 in 10 years, assuming a 7.5% average annual return. But that same investment with no tax drag would be worth $1.03 million. The numbers are even more telling when you look at the hypothetical growth of $500,000 over 20 years.

A tax-managed approach to investing can not only give an advisor’s clients more money to work with and further invest, it can help differentiate their practice.

Helping investors keep more of what they earn

Hypothetical growth of $500,000 at 7.5% annual return per year | 10 years & 20 years

This example does not reflect the deduction of state or federal income taxes. If it had, returns would have been lower. This is a hypothetical illustration and not meant to represent an actual investment strategy. Taxes may be due at some point in the future and tax rates may be different when they are. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Communicate advisor value

This post-pandemic world could be the perfect time for advisors to reassess the full value they deliver and how they communicate that value to their clients.

We know that many advisors worked hard through 2020’s challenges to keep in touch with clients and keep them invested. Our formula shows that even if advisors were only able to help their clients avoid the behavioral mistakes that many investors make in the face of the significant volatility we saw, advisors have already provided value above and beyond their fee. Add to that their other services, the active rebalancing, customized client experience advisors give clients, ensuring their portfolios align with their specific goals, and the savings from a tax-managed approach, and it seems clear that the value advisors deliver is significant.

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