Are Advisers worth fees?

When you use an adviser properly … and the adviser should be helping, nudging, and guiding you so you do … the value added can make up for their fees. This is according to Morningstar research on the possible value-add of using an adviser.

The Wall Street Journal Market Watch summarizes the research:

“Through simulations, Morningstar’s researchers found that a hypothetical retiree could generate nearly 30% more income using a Gamma-efficient retirement-income strategy.

That’s equal to kicking up the annual arithmetic return by 1.82% compared to the average person making those same decisions.”

“For example, conventional wisdom since the early 1990s has been that asset allocation is the most important factor in determining potential return.

When it comes to an adviser boosting income for a lifetime, however, Morningstar found that a “dynamic withdrawal strategy,” which Blanchett described as “going in once a year and, based upon market performance and market strategy, figuring out what is a sustainable withdrawal for that portfolio.” The second-most important decision involved making sure that allocation decisions were tax-efficient.

An investor who pays a financial adviser to pick mutual funds either misses the point of planning or has a bad adviser. (emphasis added). In fact, Blanchett said that the thing that surprised him the most about the research was the value of annual meetings, where clients and advisers tweak strategies, particularly as the consumers is entering or in retirement; both advisors and clients tend to focus on market results more than the benefits they get from having that sit-down.”

Moral of the story: Investors make mistakes. This study shows there is a valued added when the adviser helps people avoid errors.* Other studies suggest most of the errors are either emotional or lack of information and perspective.

Value comes from a focus on those things that you can actually control … markets and economies are beyond any one person’s control … thus learn how to set the sails instead of trying to control the wind.

PS. David Blanchett, who is quoted in the article above, is one of my collaborators on our retirement withdrawal research. Of course, advisers can not determine specifically what their valued added number is because it depends on unknown facts about unknown futures. However, making dynamic annual decisions, in other words reviewing progress each year and making adjustments accordingly, is what David, John and I have pioneered when it comes specifically to annual retiree portfolio distributions to support living expenses.


*Note: This value added discussed above is NOT from investment improvement, that is called Alpha (another greek letter).

Another blog on adviser fees.



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9 Responses to Are Advisers worth fees?

  1. Larry Frank, Sr. December 5, 2014 at 2:17 pm #

    More support that hiring an adviser is better for you than going it on your own:

    Here’s a summary, by Kitces, of a paper:

    “(Terrance Martin & Michael Finke, Journal of Financial Planning) – This research study drew on data from the 2004 and 2008 administrations of the National Longitudinal Survey of Youth (which began in 1979, and now consistents of participants who are in their late 40s and early 50s) to evaluate the intersection of retirement savings and the use of financial planners. Amongst the overall data set, about 70% of the households had not even evaluated where they stood for retirement, nor did they use an advisor; amongst the remaining 30%, there were 13% who were deemed “self-directed” (they had evaluated their retirement needs on their own), 11% who used a comprehensive planner (had an advisor who helped them to evaluate their retirement needs), and 6% who used a (not-comprehensive) advisor (an advisor who had not done any retirement needs analysis for the client). When segmented in this manner, the households that used a comprehensive planner had significantly more income, net worth, and retirement assets, than the other groups (and notably, the self-directed had more retirement wealth than the non-comprehensive planner group!), and a historical trend analysis found that going back to the early 1990s, the comprehensive planning group had consistently been growing their retirement wealth faster than the others. Of course, there’s a possibility that the results may simply be an artifact of the fact that certain groups – e.g., those with more income, education, etc. – may be both more likely to accumulate wealth and use a comprehensive planner; however, a subsequent analysis controlling for socioeconomic status still found that those who used a comprehensive financial planner had significantly higher retirement wealth accumulation (and also higher than simply preparing a self-directed retirement strategy).”


  2. Larry Frank, Sr. November 11, 2016 at 8:37 am #

    Vanguard proposes the term “Advisor Alpha” to explain this broader concept. David Blanchett and Paul Kaplan at Morningstar settled on “Gamma.”

    Vanguard’s Advisor Alpha is discussed here

  3. Larry Frank, Sr. October 23, 2017 at 4:22 am #

    An example – just on the investing side of the equation (there are other elements like making sure you don’t outlive your money, tax efficiency, re-balancing regime where you don’t let emotion over rule the mathematics of the discipline, and more – see Vanguard and Morningstar summaries):

    If you can get 7%, but like many investors get 4% (Dalbar), then paying 1% means you net 6% with that advice, then you’re 2% ahead of where you’d be without that advice, insights, and help.

  4. Larry Frank, Sr. December 28, 2017 at 6:48 am #

    Kitces has a great article that summarizes what clients should be looking for in an adviser – it is NOT trading or investing – but stuff people don’t even think about, either from and adviser or planning in general


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