The True Value of Working with a Fiduciary Investment Advisor

What is the value of working with a fiduciary investment advisor?

This question is of the highest importance to investors, financial advisors, and the finance industry in general.

Advisors and investors have long struggled with determining the statistical value of the service provided. Calculations of value are often affixed to investment performance and often underestimate the value of financial planning actions not related to portfolio construction.

Comprehensive financial advice can provide value outside simple investment returns in a multitude of ways, and is an ongoing, always changing process. Some examples of where this value can be found include:

• Being a source of expert knowledge, experience, and reasoning for the client
• Helping investors uncover their goals and establishing clear plans to meet those goals
• Managing portfolios to maximize returns with the least risk and minimizing taxes
• Preparing investors to deal with the possibility of unexpected catastrophic events that have the potential to affect income, savings, or even retirement dates
• Keeping on top of an investor’s changing life and needs, and making sure that plans stay on course and adapt where necessary
• Offering support and guidance to help investors stay on the right track and provide peace of mind

With that said, how can someone quantify what effect those services may have on their plan?

Each year, Russell Investments produces an easy-to-understand report calculating the value of working with an investment advisor. They recently estimated the value added as more than 5% annually.¹

This is the additional percentage return that investors may achieve by working with an advisor compared with going at it alone, calculated by analyzing the following factors:

• Customized family wealth planning
• Tax-smart planning & investing
• Aid in avoiding behavioral portfolio management mistakes
• Essential investment advisory services
• Active rebalancing of investment portfolios

Choosing a Financial Advisor

Having decided to seek out a financial advisor, choosing what type of advisor you want to manage your finances is a big decision.

It can be incredibly confusing as an investor looking for a trusted advisor due to the wide range of titles and terminology in the financial services industry.  You’ll hear of advisors, brokers, broker-dealers, financial consultants, and investment advisors, to name a few.

In order to simplify things, the most important factor to know when choosing a financial advisor is whether that person is a fiduciary. A fiduciary has a legal duty to act in a client’s best interest.

A fiduciary investment advisor has a duty of loyalty to the client, which means they must always put the client’s interest ahead of their own, or their firm.

It is important to note that many financial advisors are not fiduciaries.

Non-fiduciary advisors are held to the suitability standard of care. This means that the recommendations made by that advisor only have to be suitable for the client’s risk tolerance and objectives, but not necessarily in  the best solution available.

Benefits of Working with a Fiduciary Advisor

Additional quantifiable benefits can come from working with a fiduciary investment advisor. Just a couple of examples are:

• Eliminating hidden fees and commissions

Advisors often get paid by accepting payments from mutual fund families for recommending their funds. Most fiduciary advisors do not accept these payments.

Eliminating these payments can reduce the expenses you pay on a mutual fund by anywhere from 25 to 75 basis points. These savings pass directly to the investor.²

• Being product agnostic

Investment advisors working for large brokerage firms, insurance companies, and banks, are often required to recommend their employers’ funds first to their clients — regardless of cost or performance.

Fiduciary investment advisors must make the best recommendation possible for their clients. This can result in lower fees and potentially better performance.

Fiduciary investment advisors provide a great deal of value in a host of ways; the value of helping investors reach their goals is greater than many people realize. By making that value tangible, investors can make a more informed decision when choosing to work with an advisor.

Sources:

1. https://russellinvestments.com/Publications/US/Document/Value_of_an_Advisor_Study.pdf
2. https://www.forbes.com/sites/robertlawton/2018/08/13/fiduciary-investment-advisers-may-add-more-than-6-in-value/?sh=700614ea1b81