In a new paper, Vanguard researchers have introduced a three-part framework for measuring the value of financial advice to investors.

Using data derived from Vanguard Personal Advisor Services clients, Assessing the Value of Advice demonstrates that the value of advice encompasses three broad dimensions: portfolio, financial, and emotional.

“Vanguard has long focused on advice and the value it delivers to investors,” said Steve Utkus, global head of investor research for the Vanguard Investment Strategy Group and co-author of the paper. “The value of advice has traditionally been focused on portfolio outcomes, but as our new framework illustrates, a broader definition including financial and emotional outcomes provides a more comprehensive assessment of advice’s true value.”

In the paper, Vanguard researchers highlighted the following findings:

• Portfolio outcomes: The implementation of financial advice materially altered the equity risk taking for two-thirds of investors, changed international allocations for 90 percent, and reduced cash holdings — and their associated opportunity cost — for 28 percent. Additionally, single-stock risk was effectively eliminated for the 10 percent of investors who had held significant positions in individual stocks. Portfolios based on index funds increased for eight in 10, leading to considerably reduced costs.
• Financial outcomes: The researchers analyzed goal success rates among Personal Advisor Services clients and found that 80 percent with a defined retirement goal had at least an 80 percent probability of achieving their objective, while 20 percent had a mismatch between their projected level of retirement resources and desired standard of living.
• Emotional outcomes: To quantify emotional outcomes, the researchers developed an estimate for the fraction of value in an advisory relationship that arises from emotional elements, such as trust in, or a personal connection to, an advisor. Vanguard found that emotional outcomes account for 45 percent of the total value perceived by the investor, while 55 percent of the value is attributed to functional aspects of the relationship, such as portfolio management and financial planning.

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