Monday Morning Minute

I hope you had a wonderful weekend! We are chock full of national celebrations today. Besides being Columbus Day today it is also National Moldy Cheese Day. Think that moldy cheese in your frig is no good? Think again! It may just be getting properly aged. The link provides guidance to us all on salvaging that last bit of moldy cheese in your office or home refrigerator.

LRPC’s Monday Morning Minute for this week, “Value Of An Investment Advisor In 2017 Is 4%” (presented below) comes to you courtesy of Russell Investments. As an independent, objective Registered Investment Advisory (RIA) firm, Lawton Retirement Plan Consultants, LLC (LRPC) has access to research from many sources. Be assured that I will share enlightening, useful information with you each week.

Are you getting value from your relationship with your financial advisor? Check out the services you should be receiving below, and the estimated value added to your portfolio each year.

Have a wonderful week!


Value Of An Investment Advisor In 2017 Is 4%

By Brad Jung, Russell Investments

Updating our annual “Value of an Advisor” study for 2017 seems especially relevant given the spotlight that the DoL fiduciary rule has shone on all manner of fees in recent months. Regardless if the fiduciary rule is materially changed or not during the current delay, the fact remains that fees — and the value clients derive from them — are forefront in investors’ minds today. And yet, as in the past four years of this study, we have concluded that the value an advisor delivers to their clients materially exceeds the 1% fee they typically charge for their services.

Eight consecutive years of strong U.S. stock market performance (Russell 3000® Index) no doubt contribute to some of the popular skepticism about the value of advisors. When virtually all stocks are rising, it doesn’t seem hard to throw together a winning portfolio. However, that view completely overlooks the fact that the value advisors deliver rests in many places — not only investment selection. In fact, standard investment selection has arguably become one of the least valuable parts of an advisor’s value.

Instead, the technical and emotional guidance that only a trusted, human advisor (as opposed to robo-advisors, for instance) can offer to investors who are attempting to undertake the complex job of coordinating the accumulation, distribution, and transfer of their wealth, is invaluable – particularly in an environment that is likely to deliver lower returns and higher volatility than investors have grown accustomed to recently.

Of course “invaluable” is a difficult sum to bill a client for, though, so at Russell Investments, we have attempted — this year again — to estimate the value of an advisor. In 2017, we assess the value of an advisor to be approximately 4.04%.

Here’s how we arrived at that conclusion.

Annual Rebalancing of Investment Portfolios

Particularly in periods of rising markets, it can be easy to underestimate the value of a disciplined rebalancing policy. But that’s a mistake. A hypothetical balanced index portfolio that hasn’t been rebalanced to policy weights since the bottom of the Great Financial Crisis on March 9, 2009 would look more like a growth portfolio today, exposing the investor to more risk than initially agreed upon.

Regular rebalancing has the potential to add value — to the tune of 0.2% in additional return and 1.6% of risk reduction.

An additional 0.2% in return may not seem like much at face value. But, compounded over a multi-year period, it can quickly add up. Consider a hypothetical $100,000 investment. An annualized 8.6% return over 30 years would growth the initial $100,000 to $1,188,214. An additional 0.2% in return (so, an annualized 8.8% return instead of an 8.6% return) would yield an ending amount of $1,255,645. That’s a $67,431 difference. It just goes to show that small numbers, even after the decimal point, can make a big difference.

Annual value of rebalancing: 0.2%

Behavioral Mistakes Individual Investors Typically Make

Although advisors don’t typically include “behavior coach” in their job description, it’s most likely the single largest contributor to the total value they bring their clients. Left to their own devices, many investors will “buy high” and “sell low.”

From 2009 to 2013 investors withdrew more money from U.S. stock mutual funds than they put in. Unfortunately, the stock market steadily climbed — to the tune of 16.1%, based on the Russell 3000® Index from 12/31/2009 to 12/31/2013 — during that time. Those investors who have chosen to stay in cash since the market bottom on March 9, 2009 to the end of 2016 fared even worse: they forewent a cumulative return of 300%, based on the Russell 3000 Index.

What impact might this type of behavior have on the “average” equity investor’s portfolio?

Left to their own devices, the average stock fund investor’s inclination to chase past performance cost them 2% annually in the 32-year period from 1984-2016. In that sense, an advisor’s ability to keep their clients true to their long-term financial plan, and thereby skirt irrational, emotional decisions, is worth 2.0%.

Annual value of eliminating behavioral mistakes: 2.0%

Cost of Basic Investment-Only Management (aka, robo-advisors)

What should an advisor who delivers investment-only management and no financial plan, no ongoing service, no guidance, nothing except for an annual statement, online access and a phone number to call in case of questions charge their clients? Robo-advisors have set that price at approximately 0.33%.

Annual value of basic investment management services: 0.33%

Planning Costs and Ancillary Services

As part of a fee-based relationship, advisors add value by building and regularly updating a custom financial plan for each client and conducting regular portfolio reviews. Many also offer ancillary services, such as investment education, assistance with annual tax return preparation, Social Security and retirement income planning, as well as one-off custom requests from clients — all of which could cost thousands of dollars if purchased à la carte.

How much does the financial planning component cost nowadays?

Per a recent Financial Planning Association’s (FPA) study, the cost of developing and building an initial financial plan is coming in at around $2,600 on average (which includes the cost of the advisor spending up to 13 hours interviewing the investor as a basis for the plan). Planners now typically charge an hourly rate of approximately $200 per hour for ongoing monitoring and updating of the plan.

By providing a financial plan with ongoing goal and risk tolerance monitoring, the value of both the initial plan and ongoing adjustment are worth approximately of 0.50% on a $500,000 account. In our example here, we assume that creating and maintaining the financial plan are part of the annual advisory fee.

What is the value of typical ancillary services an advisor and their staff offer?

Advisors and their staff consistently underestimate the value of the ancillary services — time-saving and peace of mind during tax season, in preparation for retirement, custom requests and questions — they may provide their clients. These additional services can quickly consume 20, 50, or 100 hours each year. I estimate that value at 0.25% (assuming these are part of the annual advisory fee).

Annual value of planning and ancillary services: 0.75%

Tax-Aware Planning/Investing

Even before the current uncertainty about future tax policy in the U.S., few investors recognize the direct correlation between their Tax Form 1099 and their after-tax investment portfolio return. Tax-aware planning and investing is an area where advisors can distinguish themselves from the competition and demonstrate fiduciary standards of expertise and putting their clients first.

There is no shortage of opportunity for advisors to make a difference. First, the average annual tax drag for the five years ending December 2016 was material: An investor in non-tax-managed U.S. equity products (active, passive, ETFs) lost on average 1.53% of their return to taxes in the five years ending December 31, 2016. Meanwhile, an investor in tax-managed U.S. equity mutual funds forfeited only 0.73% of their return to Uncle Sam over the same time period.

Second, this is far from being a niche problem: Taxable investors hold $7.2 trillion of the $15.7 trillion invested in open-end mutual funds.

Tax-aware advisors can add value for their clients by:

  • Helping build and implement a personalized, comprehensive tax-sensitive investment approach, and
  • Implementing the plan by using a variety of appropriate products.

So, what is the value of a tax-aware advisor over a five-year period? It’s at least the difference between:

  • Average tax drag of non-tax-managed U.S. equity mutual funds = 1.53%, and
  • Average tax drag of tax-managed U.S. Tax-Managed Mutual Funds = 0.73%.

Annual value of tax-aware planning and investing: 0.80%

The Bottom Line

What is the true value as an advisor in 2017? If you are receiving all the services and value beyond the cost of investment-only advice, then the value of service you are receiving may be:

Annual rebalancing: .20%

Eliminating behavioral mistakes: 2.00%

Basic investment management services: .33%

Planning and ancillary services: .75%

Tax-aware planning/investing: .80%

Total: 4.04%

For many advisors, this means that the value they deliver is worth more than the approximately 1.00% fee they charge their clients. Clearly, investors stand to benefit from such a trusted relationship with an advisor — particularly at a time of record high U.S. equity markets and likely rising interest rates. At the same time, advisors also stand to gain from relationships with satisfied clients in today’s competitive landscape of margin compression, regulatory scrutiny, and demographic change. After all, satisfied clients are likely to be persuasive advocates for the advisor, repaying the advisor with worthy referrals that can potentially help enhance the value of the advisory firm.


About LRPC’s Monday Morning Minute

Lawton Retirement Plan Consultants, LLC (LRPC) Monday Morning Minute is crafted to provide decision-makers with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.

About Lawton Retirement Plan Consultants, LLC

Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to retirement plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or or visit the firm’s website at Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.

Additional Important Disclosures

These views are subject to change at any time based on market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.