Permanent Value

Week in Review 5/15/14

Bruce Doole
May 15th, 2014

3% Advantage
There is a potential of about 3% in additional net returns that can be produced by providing cogent wealth management, financial planning, and guidance.

Recognize that wealth management is more complex — and that greater value could be generated by refocusing financial planning on long-term outcomes rather than year-to-year results.


The bottom line: Advisors can add “about 3%” in net returns when comparing the projected results of a portfolio that is managed using well-known and accepted best practices for wealth management with those of portfolios that are not. This 3% should not be viewed as an annual value-add, but is likely to be intermittent: Some of the most significant opportunities to add value occur during periods of market duress or euphoria, when clients are tempted to abandon their well-thought-out investment plan.

Although the exact amount may vary depending on client circumstances and implementation, an advisor can add value by:
Being an effective behavioral coach. Helping clients maintain a long-term perspective and a disciplined approach is arguably one of the most important elements of financial advice. (Potential value add: up to 1.5%.)

Applying an asset location strategy. The allocation of assets between taxable and tax-advantaged accounts is one tool an advisor can employ that can add value each year. (Potential value add: from up to 0.75%.)

Employing cost-effective investments. This critical component of every advisor’s tool kit is based on simple math: Gross return less costs equals net return. (Potential value add: up to 0.45%.)

Maintaining the proper allocation through rebalancing. Over time, as its investments produce various returns, a portfolio will likely drift from its target allocation. An advisor can add value by ensuring the portfolio’s risk/return characteristics stay consistent with a client’s preferences. (Potential value add: up to 0.35%.)

Implementing a spending strategy. As the retiree population grows, an advisor can help clients make important decisions about how to spend from their portfolios. (Potential value add: up to 0.7%.)

How an advisor approaches two additional principals of wealth management — asset allocation and total return versus income investing — can also add value, but are too unique to each investor to quantify.


By showing how the right financial advice can affect net returns, the value proposition of advisors is more tangible. It’s a very real number that can help in conversations to reinforce the importance of sticking to a plan and following sound financial advice.

Source: Financial Planning Magazine