The short answer is, if the advice is not good, then no. Absolutely not. Bad advice can actually leave a person worse off than receiving no advice at all. If you want to assess an adviser to see if they offer good advice, here are some questions that can help you. A bad doctor can cause harm, a bad lawyer can play a role in tarnishing your reputation, a bad real estate can cost you more. Financial advice is similar.
If the advice is mediocre or ‘okay’, it might be worth it, but it’s a coin flip. I wouldn’t recommend anyone get advice that is just meddling, especially when there are so many high-quality advisers accessible, don’t limit yourself.
If the adviser you work with is good or excellent, then, it’s worth it, and there is a mountain of supporting evidence for that. Essentially, it boils down to 2 main things: feeling better and having more. Let’s look at both in more detail:
Feeling Better
The main ways of categorizing 'feeling better' include:
a. Peace of mind and not having to stress about money as much
b. A positive impact on wellbeing
c. Use your time the way you want
d. Better communication and relationship satisfaction (including lower likelihood of divorce)
e. Understand what your life can look like and how to get there
f. Education on investing, so you feel more empowered
Here you can see the results from The Financial Services Council of New Zealand and a study they performed to see how advice helped clients understand more about their circumstances, options, needs, and focus:
Having More
Having more is more of the numbers and quantifiable stuff. Here’s what the evidence shows:
In NZ, investors that use an adviser tend to have:
This is what it looks like to receive 4% better returns each year, depending on the life stage an investor is in.
Vanguard did a study and found that investors using an adviser did approximately 3% better on average, but they managed to break down where the value is added and also, WHEN.
Take a look at the table and you’ll see the majority of the value added comes from behavioral coaching. The funny thing is, this table doesn't show ‘when’ value is added. Most of that value is lumpy and doesn’t happen consistently each month. It comes most during times of fear and greed, or put another way, behavioral coaching may not add much value for a period of years, and then it tends to pay off very big, when an event takes place.
Example
The image shown right depicts how an investor just before COVID may have invested $10,000 and then watched it plummet to about $8600 and panicked, so they sold their investment and kept it in the bank. If that investor chose to ‘wait it out’ and let the volatile market ‘pass’ what they are really doing is missing the big upswing that usually follows. If they reinvested the following January, they would be 30% worse off, or have $2,958 less than if they just stayed invested. That’s what an adviser can help with and it shows what behavioral coaching does; it makes sure someone stays invested during the tough times (assuming that fits in with the investor’s long-term plans).
MorningStar, a research company
found a similar theme that advisers can help investors make better decisions that enable investors to draw 22.6% more from their portfolio than unadvised investors.
In terms of total wealth, there are 2 studies that have found different numbers, but the idea is the same. The longer an investor receives advice, the larger their wealth tends to be compared to investors receiving no advice (these studies control for income and wealth, so it’s not only showing the wealthy people that can ‘afford’ advice compared to those that can’t). The Royal Bank of Canada found that after 15+ years of advice, investors had 3.9x the amount of wealth as unadvised investors, while CIRANO found it was 2.73x after 15 years. Even using the lower number (2.73x), if an unadvised investor accumulated $500,000 after 15 years, an advised client might have $1,365,000. That’s a big difference.
Here is what Forbes magazine had to say on the matter, “Can an advisor charging a 1% fee provide enough value to justify the fee? It depends on the answers to two questions:
(a) Do you have the time, energy, interest, knowledge, emotional discipline, and desire to implement all of these decisions on your own?
(b) Are you working with a comprehensive financial planner who does more than just manage investment portfolios and is capable of implementing good financial planning decisions?
If you have the time, interest, energy, knowledge, emotional discipline, and desire to do this on your own, then you would make an excellent advisor. If your advisor is less than capable, you might be better off saving yourself the 1% or taking your business elsewhere.”
Putting it all together
Acting as a behavioral coach is the biggest way an adviser can help clients and their money. The funny thing is, it’s also usually the last thing an investor thinks about how an adviser will be valuable. So yes the good advice is worth paying for, because it often pays for itself, however, most investors get the added emotional and well-being benefits. Once you know where you are going in life and a have plan for it, it gives you the opportunity to relax, feel understood and taken care of. That’s harder to put a price tag on, but it’s part of the package.
Citations
7. MorningStar: Alpha, Beta, and Now…Gamma, by David Blachett, CFA, CFP®, and Paul Kaplan, Ph.D., CFA