The Real Value of Advice

June 8, 2020

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Good advice can make a powerful difference for retirement readiness.

Real Value of Advice

When it comes to saving for retirement, good advice matters. That's the conclusion of "Assessing the Value of Advice," a recent study by The Vanguard Group, Inc. The study sought to quantify the impact of Vanguard Personal Advisor Services® (PAS), which delivers financial advice through a combination of human advisors and algorithms.

Many defined contribution plan sponsors don't include advice as part of their plans. Some worry about the burden of the additional fiduciary oversight required. Others question the value relative to the costs. Still others figure the automation of plan enrollment, contribution increases and default investments makes advice moot. Many employers also struggle to quantify how much advice is worth. "There's a rigorous industry debate about the value of advice," says Dean Edwards, head of advice and wellness for Vanguard's Institutional Investor Group. "You need to show these services really offer a benefit."

The financial and emotional impact of advice

Employees today face a challenging path to retirement. The shift from defined benefit plans to defined contribution plans has given individuals greater responsibility for saving and investing their money. Slowing wage growth makes it harder to save, while extended life spans require more assets to fund longer retirements. Long-term expectations for market growth are more muted than they have been historically, Edwards says. Meanwhile, two-plus decades of behavioral finance research has shown that many humans would prefer not to think about such long-term challenges—even if a more proactive approach would serve them far better.

Vanguard's study examined three spheres of participants' financial lives and behaviors, finding advisory services helped considerably with each:

Portfolio value

The study examined 44,000 previously self-directed participants who became PAS clients between 2014 and 2018, comparing their portfolios six months beforehand and six months afterward. It explored the impact advice had on the participants' portfolio construction and behavior, including the risk and return characteristics of portfolios, tax efficiency, fees, rebalancing and trading.

Vanguard's study found clear evidence that advice can help individuals build healthier portfolios with more diverse holdings. Two-thirds of individuals changed their equity allocations by 10 percentage points or more, and those who changed tended to reduce extreme positions: The most conservative investors boosted their equity positions substantially, while the most aggressive investors reduced their equity allocations.

The study noted other improvements as well. More than 9 in 10 investors changed their international allocations, with most increasing their foreign holdings—all but eliminating home-country bias. And more than 3 in 10 reduced their cash allocations by at least 10 percentage points, gaining greater exposure to the long-term power of compounding.

Financial value

Edwards notes that the value of advice extends well beyond the retirement portfolio. Participants need help prioritizing multiple financial needs, including paying down high-interest debt, managing college loans and building an emergency fund. "Helping people build healthy personal balance sheets will eventually make them better savers, freeing up more dollars for retirement savings," he says.

Vanguard's study looked at PAS participants' likelihood of achieving a secure retirement, based on a proprietary metric called "goal success rate." As of January, 2019, 8 in 10 PAS investors had an 80% or better chance of achieving their retirement goals, and the vast majority had rates between 90% and 100%.

Emotional value

The report also evaluated the emotional impact of advice, using surveys of more than 500 PAS members. Individuals' responses indicated that nearly half of the value that advice provided was emotional, resulting from developing a trusted relationship with an advisor, receiving assurance and having a feeling of protection. "So many people overlook the emotional outcomes of advice because they're so difficult to quantify," Edwards says. "This research lets us view emotional value in a quantitative way."

Emotional value doesn't just feel good, it also has positive financial ramifications. The steady hand of an advisor can guide clients through volatile markets, helping them avoid the behavioral mistakes that can knock them off course. "Part of the emotional support participants described relates to behavioral coaching," Edwards says. "An advisor can serve as a ballast in times of market turbulence and discomfort. There's significant value in that."

Engage with advice

Participants can find comfort engaging with an advisor in different ways. Robo-type advisory services using machine learning can deliver highly targeted and personalized recommendations. Human advisors can bring a level of empathy and emotional connection that robots are hard-pressed to replicate. Both sources of advice are valuable, helping drive better investing, financial and emotional outcomes. Together, they also offer another benefit: a powerful platform for participants to engage.

Modern plan design features have ushered more participants into their employer's plan and put their money to work more effectively. Edwards notes that advice can build on this momentum by encouraging greater engagement between employees and key aspects of their financial lives. "The more participants engage," he says, "the more value we can unlock for them."

To learn more about the real value of advice at Vanguard, please click here.

Developed in collaboration with The Wall Street Journal.

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  • All investing is subject to risk, including the possible loss of the money you invest.
  • Diversification does not ensure a profit or protect against a loss. Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.
  • Advice Services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.