The Cost of Not Having an Advisor

Looking at charts and numbers


According to a recent Dalbar study, “The 24th Annual Quantitative Analysis of Investor Behavior”,  it has become clear that the average retail investor is seriously underperforming in the equity and fixed income market.  This is not to say that an average investor traversing the stock market cannot take advantage of market returns. However what this study suggests, is that a lack of education as well as general retail investor behavior (the psychological/emotional element) are causes of diminished performance when it comes to returns.  You may not think that those factors have a big impact on your bottom line but you would be surprised.


The role of an Investment Advisor is to eliminate those elements of the equation that negatively impact your bottom line, and hopefully add to your returns.  A Vanguard study titled, “Putting a value on your value: Quantifying Vanguard Advisor’s Alpha” actually quantifies the value that an advisor adds to your portfolio: an estimated 3%1.  The net value that is added by having a financial professional is a 3% additional return on an investors’ money.  When it comes to rate of return that extra 3% is substantial.  This 3% return is in addition to the investment return that has already been achieved by the investor.  Over a lifetime of investing, we could be talking about hundreds of thousands of dollars that are being left on the table.  This is, in my opinion, too much money being lost by the average investor by simply not having a professional advisor to maximize the value of their hard earned money. The following chart, from a Seeking Alpha article, displays the diminishing returns brought on by investor behavior: 2


According to the same Vanguard study, that 3% additional return can be broken down into 5 parts1 .  They are:


  1. Cost-effective implementation (expense ratios)---- 0.40%,
  2. Rebalancing--------------------------------------------------0.35%
  3. Behavioral Coaching---------------------------------------1.50%
  4. Asset Allocation---------------------------------------------0 to 0.75%, &
  5. Spending Strategy (withdrawal offer)-----------------0 to 1.10%.

These five tasks that financial advisors carry out is the value that they bring.  The 3% they add to your returns. Even if a financial advisor’s fees added up to 1% , you are still getting 2% more than you otherwise would have.  

If you do not have a financial advisor at the moment, I urge you to highly consider one.