male and female advisors and investors talking New research from Vanguard on the value offinancial advice goes beyond portfolio comparisons and includesassessments of the emotional value advisors deliver. (Photo:Shutterstock)

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Is financial advice worth its cost?

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Academics and financial service providers have addressed thequestion with varying degrees of conclusiveness.

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Many studies have focused on the portfolio composition andoutcomes of advised and non-advised investors.

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New research from Vanguard sets out to expand how the value ofadvice is determined by expanding beyond portfolio comparisons andincluding assessments of the financial value and emotional valueadvisors deliver.

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"Academic and policy researchers have contributed competingnarratives as to whether or not professional advice contributes toinvestor value," write Cynthia Pagliaro, senior research analystwith the Vanguard Center for Investor Research, and Stephen Utkus,director of the program.

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"We believe the advisory community needs to build a broad set ofmeasures beyond portfolio outcomes to quantify and report on valueto investors. Only when value is clearly defined can debates overvalue for money be considered," the analysts write in their newresearch paper, Assessing the Value of Advice.

Portfolio outcomes

The research culls data from Vanguard's Personal AdvisorServices, the firm's hybrid advisory program that pairs human andautomated approaches, which launched in 2014.

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A sample of 44,000 accounts held by investors at or nearretirement in the PAS program showed that two-thirds of accountssaw a material change in their overall equity position—at least a10 percent increase or decrease in allocation—after enrollment.

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Nine in 10 increased their exposure to international securities,and 27 percent reduced their cash holdings. Seven in 10 increasedthe portion of their indexed funds, and 9 percent reducedconcentrations in a single stock.

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"These results underscore the impact that advice can have onpreviously self-directed investors, including adjusting portfoliorisk-levels, fully investing in fixed income securities rather thanin cash reserves, and eliminating home bias. PAS advice also led toa higher passive fund share and substantially reduced or eliminatedsingle-stock risk," the paper says.

Financial outcomes

Comparing the financial outcomes of advised accounts toself-directed accounts depends on how success is calculated.

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In its study, Vanguard focused on the goal most commonlyidentified by its clients in the PAS program: a secureretirement.

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Based on data from 100,000 accounts, eight in 10 of Vanguard'sPAS clients had an 80 percent or greater probability of achieving asecure retirement. Three-quarters had a 90 percent to 100 percentprobability. Eight percent had a 0 percent to 9 percent probabilityof success.

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The high rates of preparedness were encouraging, but could alsosignal that some savers may be over-preparing, and perhaps livingmore modestly than necessary in prepping for retirement.

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The 20 percent of savers that fell below the 80 percentprobability threshold tended to be at or near retirement age andhad assets and savings well below what they need to fund theirretirement expectations.

Emotional outcomes and the role of the advisorrelationship

Can advisors, or services such as Vanguard's PAS program, createemotional security for retirement investors?

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The paper defines that subjective psychological measure bygauging investors' trust and confidence in advisors. It alsoattempts to calculate the sense of accomplishment investors have inpreparing for retirement goals, as well as the literal emotionalsupport advisors give during market shocks or personal battlesinvestors face—think job loss or a death in the family.

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Based on a survey of 24 questions put to 504 PAS investors ofvarying demographics, Vanguard found the answers that related tothe emotional element of an advisor's role accounted for 45 percentof the investors' perceived value. The hard services—portfoliomanagement and financial planning—accounted for 55 percent of theperceived value.

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"Our results highlight the need for a broader advisory industryinvestment in value metrics," write Pagliaro and Utkus.

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"Assessing value for money for the investor must begin with acomprehensive measure of value. As the industry grows in scale andimpact and the emphasis on investor value continues, additionaldata-driven benchmarks will be needed to evaluate advisor qualityand efficacy," they add.

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.