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New Vanguard framework assesses the value of financial advice


Vanguard researchers have published a new paper introducing 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,” says Steve Utkus, global head of investor research for 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 per cent, and reduced cash holdings—and their associated opportunity cost—for 28 per cent. Additionally, single-stock risk was effectively eliminated for the 10 per cent of investors who had held significant positions in individual stocks. Portfolios based on index funds increased for eight in ten, leading to considerably reduced costs.
• Financial outcomes: The researchers analysed goal success rates among Personal Advisor Services clients and found that 80 per cent with a defined retirement goal had at least an 80 per cent probability of achieving their objective, while 20 per cent 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 per cent of the total value perceived by the investor, while 55 per cent of the value is attributed to functional aspects of the relationship, such as portfolio management and financial planning.
While there have been many industry and academic studies seeking to develop better ways to measure the value of advice, Assessing the Value of Advice presents new insights by leveraging metrics based on administrative and survey data from Personal Advisor Services clients.
“We employed both quantitative and qualitative analysis, studying the asset allocations of nearly 45,000 clients, the goal success rates of nearly 105,000 clients, and surveys completed by more than 500 clients to gauge their perceptions of value in their advisory relationships,” says Cynthia Pagliaro, senior research analyst with Vanguard Center for Investor Research and co-author of the paper.

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