A History of Cost and Value of Advice

I started in the financial services industry in 1996 and have watched it change significantly due to new technologies, products, and regulations. One of the most significant changes has been the cost of financial services. Commission to trade securities is all but gone, and expense ratios for mutual funds and ETFs, which averaged over 1.50% in the 1990s, was 0.36% in 2023, according to Morningstar’s The 2023 US Fund Fee Study. So, on a hypothetical 1-million-dollar portfolio, you went from paying about $15,000 a year in 1993 to about $3,600 in 2023. This does not include the cost of an advisor but for the self-directed.

The model for working with a financial advisor has also changed. When I started, you mainly had Stockbrokers who primarily made their living earning commissions either from buying and selling individual stocks and bonds or selling commission (loaded) mutual funds. In my experience, it was not uncommon for a client to pay 3 to 4 percent in total fees back then, which the client may not have realized because mutual fund expense ratios are taken out of the general assets of the fund and not listed in trade confirmations. It was also about when the registered investment advisor (RIA) model started taking off. Unlike a broker who may represent his firm's interest, the investment advisor representative (“IAR”), as a fiduciary, is obligated to put the client's interest first.

The good news is that today, instead of the all-in cost for working with an advisor on 1 million dollars of advised assets being about $30,000 - $40,000, it would be more like $15,000 - $20,000, including the IAR charges depending on a client's preference for the type of products and services they want. The other good news is that being an advisor has become more of a profession with academic standards, such as earning a Certified Financial Planner™ (CFP®)* designation, among others. So why are so many people still unwilling to work with and pay for an advisor?  

In my opinion, it is the lack of perceived value. It is challenging to quantify, even for advisors like me who know the value. Part of the problem is that the value is spread out unevenly over time. I will give you an example. I was working with a Fortune 500 company executive who was having difficulties realizing the value of my services. I worked with him for about 18 months, and he expressed his concerns about not seeing the value. Around a month after our conversation, his company offered him a package to step down and retire. As is typical with these offers, the company gave him three months to decide and submit his paperwork. Being an executive and always pressed for time, he filled out the paperwork, handed it in, and came to see me afterward. Looking at his chosen options, I believe he made some mistakes in his decisions. Luckily, his company let him change his decisions and resubmit the paperwork. He stopped by my office a few weeks later to tell me he understood the value. He told me that he and his accountant calculated that my advice may have saved a significant amount of taxes in the way I suggested the payout be structured and by opening a donor-advised fund to front-load his charitable giving. That was all true, and I thanked him for letting me know, but that was only one element in calculating the value of my advice. After that interaction, I decided to track some of my value and occasionally point it out to clients. I know the value of the advive I gave this client and thought it was apparent, which was ignorant, but I also did not want to come across as presumptuous.

Over the last several years, papers and articles have been published quantifying the value of advice. Vanguard's Investment Advisory Research Center published a paper in July 2022 called "Putting a value on your value: Quantifying Vanguard Advisor's Alpha." In that paper, Vanguard claims that implementing Vanguard Advisor's Alpha framework can potentially add up to or even exceed 3% in net returns. Morningstar paper by David Blanchett and Paul Kaplan, titled Alpha, Beta, and Now...Gamma attempts to quantify financial decision-making. They measure five specific retirement-based planning issues: determining asset allocation based on total wealth; applying a withdrawal rate strategy; incorporating retirement income products (e.g., annuities); making tax-efficient allocation (i.e., asset location) decisions; and evaluating the portfolio by treating client cash flow needs as liabilities and determining investments and their risks appropriate to help manage (and help hedge) those liability needs. The research concluded that the total benefit from the above strategies was approximately 22.6% higher retirement income, equating to about 1.59% of excess return annually. Alph, Bata and now...Gamma. The value of advice will differ for each client, depending on their needs.

What are some of the ways advisors bring value, and why do clients hire an advisor?

Time - Working with an advisor can help you save time from having to manage your portfolio yourself. Advisors tend to give you access to financial planning software to help you save time with budgeting, tax preparation, and more.  

Knowledge - Consider the knowledge needed in portfolio management, taxes, budgeting, saving strategies, income strategies, etc.

Desire - How do you view managing your finances? Even if you know what you should be doing, you may find it difficult to motivate yourself to do it and can benefit from working with an advisor. I run into this a lot. Over the years, I have had many savvy clients who can take care of their finances, and when I ask why they are considering hiring me, most will tell me that they would rather be doing other things with their time.

Coaching/Emotional - Having an advisor who can slow down the process and help you take a step back at times can be of considerable value. We have all suffered from FOMO (fear of missing out) or inertia. Many clients have told me that some of the best value I have provided is helping to act at times and not act at other times.

Mediator/diplomat — When I considered taking finance in college, my sister worked on a bond desk and said I could talk with her boss about a career in finance. I told him I wanted to work with clients directly in some capacity. He suggested I take as many courses in psychology and philosophy as possible and even consider majoring in one of those. That turned out to be great advice.

As advisors, we often find ourselves in the middle of helping settle family financial disputes. I don't know how you put a value on helping prevent family members from becoming estranged, but I can tell you it is high.

I could continue with more possible values, like tax savings, helping clients to invest appropriately based on their goals, etc. The more I think about it, the more there is.  

Would working with an advisor benefit you? Click the Schedule Appointment button above to schedule an appointment and learn more. 

*Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.

Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. Investing involves risks, including possible loss of principal.

Investment advice offered through Stratos Wealth Advisors, LLC,a registered investment advisor. Stratos Wealth Advisors, LLC and Synergy Wealth Management are separate entities.