Don’t be Misled by Studies on the Value Advisors Add

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A recently released report from Russell Investments assessed the value of an advisor “to be approximately 4.08% a year.” It noted that this value “materially exceeds” the 1% fee advisors typically charge for their services.

This should have been encouraging news to beleaguered advisors coping with a rapidly changing competitive environment.

It had the opposite effect on me.

The basis for the value calculation

The Russell study reached the 4.08% number by calculating the value of annual rebalancing, correcting “behavioral mistakes individual investors typically make,” the value of basic investment advice, the value of planning costs and ancillary services and the value of tax-aware planning and investing.

What’s missing?

Assuming the accuracy of the items Russell studied, here’s what’s missing:

How much would it cost an investor to obtain these benefits elsewhere?

Annual rebalancing

On the hypothetical $500,000 portfolio, the Russell study attributes a value of 0.20% to annual rebalancing.

The study ignores the fact that some investments don’t require any rebalancing. Target-date funds are one example. Balanced funds, like Vanguard’s LifeStrategy Funds, automatically rebalance. These funds are suitable for many investors.

Investors might also consider rebalancing themselves, at no cost. The process is very simple and should take no more than 30 minutes or so a year.

Investors who need the services of an advisor have many options for rebalancing that don’t involve paying 1% annually. Betterment charges a fee 0.25% annually, which includes regular automatic portfolio rebalancing, among many other services.