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).