Adviser Value Can Be Measured by Three Factors

Vanguard identifies the value of financial advice to investors as split into three factors: portfolio, financial and emotional.

In a new whitepaper, Assessing the Value of Advice, Vanguard researchers emphasize that while the value of advice was once traditionally based on portfolio outcomes, goal success rates and advisory relationships are results of effective guidance as well.

“It’s important to consider the broad definition of the value of advice and that it extends beyond traditional portfolio outcomes,” says Cynthia Pagliaro, senior research analyst with the Vanguard Center for Investor Research. “The three-part framework—portfolio, financial and emotional outcomes—presented in “Assessing the Value of Advice” is valuable for advisers who help plan sponsors craft advice offerings as well as measure their efficacy once implemented.”

According to the report, researchers studied goal success rates among Vanguard Personal Advisor Services (PAS) clients and found that 80% of participants with retirement goals had at least an 80% chance of fulfilling those ambitions, showing that financial advice is still highly valued among investors. This includes guidance on tax efficiency, fees, portfolio risk and return characteristics, and rebalancing and trading activity, according to Vanguard.

Additionally, Vanguard reports participants account emotional outcomes for 45% of total value to financial professionals, including feelings of trust, confidence and personal connection to the financial planning institution or adviser. Vanguard argues that while financial advice is imperative, value accounts for more than just quantitative measures. Financial institutions and advisers should be utilizing emotional factors, aside from a face-to-face connection, to engage participants, explains Steve Utkus, global head of investor research for Vanguard Investment Strategy Group.

“The element of emotional outcomes is not solely determined by face-to-face contact with an individual; emotional connections can be conveyed through the reputation of an employer introducing advice as a plan feature, or through the brand and reputation of the firm selected as the adviser,” he says.

While almost half of investors take emotions into account when valuing advisers, 55% value more operative aspects like portfolio management and financial planning. Emotional and financial outcomes are important for advisers to achieve, Pagliaro says, but not all portfolios will consistently be met with success.

“With respect to the latter, plan advisers need to consider measures that extend beyond returns,” she adds. “Even advised portfolios will experience periods of decline, but that doesn’t mean a decline in the overall value proposition for plan participants.”