20 Oct Quantifying the Value-Add of Wealth Managers
With all of the low-fee, index funds and exchange traded funds available to investors, the question is worth asking. The short answer is, it depends.
Research shows that good wealth managers actually produce measurably higher returns. Vanguard recently addressed the topic in this white paper, concluding that advisors could potentially add net returns of “about 3%.” Morningstar did a similar analysis and found 1.59 percent could be gained by following a manager with an efficient financial planning strategy. Calculations from both studies excluded typical benefits of actively managed investments referred to as “alpha,” or the excess return relative to an index.
What’s great about these studies is they focus on practical approaches to investing that have a high probability of success, the things good wealth managers do every day that do not depend on luck or their ability to see into a crystal ball.
Most in the wealth management industry emphasize the wrong thing. They market their value by how great they are at picking managers. Unfortunately, few can deliver on this and many of them may actually be causing more harm than good. This study shows that index funds outperformed active managers 70-80 percent of the time in most asset classes, over the past 15 years.
Beating index funds is possible, but investors need to consider how likely it is and what they are willing to pay to do it. To dive deeper into the index vs. active management debate, check out this blog I wrote discussing when active management makes sense.
You should also understand how managers are compensated and if they are held to a fiduciary standard. If they are compensated by you, the products they use, and other professionals they refer you to, it will be hard to know if they are sitting on the same side of the table as you.
When you’re weighing the value of a wealth manager, that’s a good place to start.