Quantifying the Value of a Financial Advisor

Financial services and investment behemoth Russell Investments, purveyor of the eponymous Russell Indexes and advisor of $2.9 trillion of investments, recently released their 2021 Value of an Investor Study. Likely surprising to many, Russell estimates the most valuable component of investors’ relationships with their advisors probably centers on those advisors convincing their clients to do nothing.

As presented in the following table, Russell derives that the behavioral coaching many advisors provide – convincing their investor-clients to stay the course amid market volatility and downturns – amounts to 2.02%. This behavioral coaching ranks as almost three times as valuable as the combination of active rebalancing (0.17%) and investing (0.62%). The folks at Russell arrive at this 2.02% figure by subtracting the average equity investor’s return of 9.28% over the 1984-2020 period from the 11.30% return of the Russell 3000 Index over the same time period. In other words, investors’ propensity to “buy high and sell low” rather than “set it and forget it” cost them 2.02%.

A 1.20% return to tax management also bears mentioning as it exceeds what many investors pay their advisors. Russell derives this figure by subtracting the tax drag of domestic equity funds from that of domestic tax-managed funds over the 2015 to 2020 time period. We surmise that the long-term annualized magnitude of effective tax management probably vastly exceeds 1.20% due to nothing more than the power of compounded returns over time. For example, an incremental 100 basis points of increased return, or a 1% increase in investable capital from retained tax savings, over a 10-year period, from 9% to 10%, on a hypothetical $100,000 investment represents an increase of $18,605, or +8.6%.