By Cynthia A. Pagliaro and Stephen P. Utkus
How should the value of financial advisory services to investors be measured?
In this new paper, Vanguard researchers introduce a three-part framework for measuring the value of financial advice to investors based on portfolio, financial, and emotional outcomes. The paper uses data-driven metrics to illustrate the framework and highlight the breadth of what constitutes value in an advisory relationship.
Vanguard believes financial advice can help investors achieve better outcomes and has served as a vocal advocate for the value of advice and the important role that advisors play in fulfilling investors’ needs for financial planning and wealth management.
Global demand for high-quality, cost-effective financial advice is growing. In many countries, increasing reliance on defined contribution systems means more households will be retiring with substantial savings and will need affordable and effective help in managing them. More broadly, the financial services industry faces rising demand to improve client outcomes and value for money. New robo- and hybrid advisor services have emerged to address these concerns, using technology to expand their reach and improve their effectiveness.
A large number of industry and academic studies have sought to develop better ways to measure the value of advice to investors. Many, such as Vanguard’s Advisor’s Alpha® and the Morningstar gamma methodology,1 take a normative or simulation-based modeling approach. Several robo-advisors have attempted to model the potential benefits of their methods using hypothetical or stylized investors.2 Academic and policy researchers have contributed competing narratives as to whether or not professional advice contributes to investor value.3
Our paper adds to this debate by introducing a three-part value framework for advice, illustrated with data-driven metrics based on administrative and survey data from Vanguard’s Personal Advisor Services (PAS). PAS is a hybrid advisory service combining algorithmic and human elements introduced in the U.S. in 2014. Our intention is not to provide a comprehensive exposition of the framework but rather to highlight the breadth of what constitutes value in an advisory relationship.
We believe the advisory community needs to build a broad set of measures beyond portfolio outcomes to quantify and report on value to investors. Only when value is clearly defined can debates over value for money be considered.
Originally Posted on September 17, 2019 – Assessing The Value Of Advice
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