Published by Robert W. Huntley, CFP®, CHFC®, Founder & Wealth Advisor
Since 2001, Vanguard has updated a report annually titled “Advisor Alpha.” It’s a well-known piece among financial advisors because it is published by a highly trusted and reputable source, and it attempts to quantify the value to an average investor of working with a professional financial advisor.
One thing that makes it so interesting is that Vanguard cut its teeth originally as a low-cost way to invest in broad markets and just let the markets do what they do. Because of this, Vanguard was perceived to be against advisors who charged fees or commission for their services.
However, this report blows that idea out of the water. It concludes just the opposite. Advisors are highly valued in a client’s life and this report attempts to put that in a format that quantifies that value.
Here’s a link to the most recent version of the report: Vanguard Advisor Alpha Study
When you look at research like this, it brings to the surface something I talk about often with our clients and people who are considering hiring an advisor. The idea of having someone who knows what they’re doing positioned between you and several possible “Big Mistakes” that are common for people trying to navigate their finances without help.
There are a number of mistakes that can hurt you when it comes to finances. Let’s focus on one “Big Mistake” that in my experience is the most common and potentially the costliest for most people.
BIG MISTAKE #1 – Managing your own serious, long-term investment funds.
We like to say “delegate the dangerous” to clients and prospects. That’s another way of saying you should put us between yourself and the big mistake you may not see coming. Investing seems easy on the surface but research in the Vanguard Alpha study shows over and over that it’s not simple.
For example, the Vanguard group is in a unique position where they can look at the index funds they manage and see exactly what the markets are generating each year in the way of total returns.
They can then also look at the thousands of investors in those same funds and see how those investors buy and sell in and out of the funds. It’s then possible to calculate the returns generated by the markets and compare those returns to what the average investors who bounce in and out are actually earning.
Vanguard concludes that just on this single variable, average investors cost themselves between .22% and 2.45% in lower returns depending on the sort of fund used. It’s apparently all because of their market timing/reacting efforts.
“Advisors, as behavioral coaches, can act as emotional circuit breakers in bull or bear markets by circumventing their clients’ tendencies to chase returns or run for cover in emotionally charged markets.”
Another trusted research group called DALBAR Research does their own annual study looking at average investor returns vs. broad market returns. They see similar results to Vanguard’s study. The most recent DALBAR report shows the average investor earned 2.89% less over the prior twenty years than the market otherwise earned had they just bought and held steady all that time.
DALBAR looks at industry data from broad holdings of mutual funds and compares actual investor activity to passive broad index returns such as the S&P 500. Their most recent report once again showed the average investor underperformed the index by a significant amount.
“In 2016, the average equity mutual fund investor underperformed the S&P 500 by a margin of 4.7%.”
They go on to say that the same methodology looking back for the last 20 years showed the average equity fund investor underperformance averaged about 2.89%.
To find the full report please click on the following link: DALBAR’S 23rd Annual Quantitative Analysis of Investor Behavior
Clearly, something is going on here. It’s clear that when we’re trying to buy in and out based on our gut feeling or investment headlines, we do ourselves great harm over the long term.
Let’s do a little hypothetical math to see why this can be one of the biggest mistakes an investor can make over long periods of time.
Imagine a 30-year-old couple who’s done a great job saving into their retirement plans and they’ve already accumulated $100,000. Let’s compare the potential difference in wealth accumulation over 40 years at 5% vs. 8%.
|$100,000, growing over 40 years at 8%||$2,427,338|
|$100,000, growing over 40 years at 5%||$737,374|
|Difference in growth over 40 years||($1,689,964)|
I don’t care who you are, $1.7 million in lost potential wealth accumulation is a large, huge, ugly “Big Mistake.” Our job as advisors is to take this journey with you. We are there to remind you of your plan and strategies when you feel worried or get caught up in the latest digital currency frenzy.
Bottom line: We stand between you and the big mistake.
Do you have someone doing this for you? You should. It’s wise to find a trusted guide to help with your investing.
Let us know if we can help you or someone you care about.
Conclusions of this analysis are based on aggregate data. Performance of individual funds or advisors may be better or worse than the averages presented here. The S&P Index is an unmanaged index of large cap U.S. stocks that is considered to be representative of the overall U.S. equity market. Indexes are unmanaged; you cannot invest directly in an index. Performance illustrated is not indicative of future results.