personal finance |  september 18, 2023

What Is the Value of Financial Advice, and Would You Benefit From It?

Measuring the value according to the investors paying the bill.

 

Key Insights

  • Investment selection is the most important aspect to people who pay for advice, despite efforts by financial professionals to broaden advice offerings.

  • Retirees value investment selection and asset allocation the most, whereas people still working value retirement and tax planning more. Lifestage affects the perception of value.

  • On average, people who pay for advice identify three aspects of advice that are very valuable. That suggests that there could be a variety of value propositions that would justify a typical advisory fee.

  • People who believe they are contributing enough for retirement, and those who are not highly stressed by debt, are more likely to pay for advice. This may support the argument for employers and employees to take advantage of financial wellness or education programs.

Roger Young, CFP®

Thought Leadership Director

It's a challenging question for both investors and financial professionals: What is the value of financial advice? Several researchers have attempted to quantify this value.1 It is often expressed as a percentage of assets, since that is how investors think of investment returns, and it’s also how many financial advisors charge for their services. While this is a worthwhile exercise, there are major limitations to the usefulness of these estimates. Dollar values are hard to measure, categorize, and standardize across clients and service providers. (See sidebar below.)

To take a fresh approach to this question, we asked investors how they value different aspects of advice. This question was part of our recent Retirement Savings and Spending Study, which focuses on people who have saved for retirement using workplace retirement plans.2 We asked, “If you currently pay for financial advice or would consider paying for advice in the future, how valuable are these aspects of advice to you?” The question was posed for eight aspects of financial advice:3

  • Prioritizing goals, setting saving targets, and monitoring progress

  • Day-to-day financial management, including budgeting, paying expenses, and handling debt

  • Asset allocation (the mix of categories such as stocks and bonds) and portfolio rebalancing

  • Investment selection by the advisor4

  • Tax planning, including tax-efficient investments, accounts, and management of gains and losses

  • Retirement planning, including budgeting, withdrawal strategy, Social Security, health care expenses, and annuities

  • Ongoing help with decision-making and behavioral coaching, including maintaining a strategy, encouraging saving, and handling setbacks

  • Estate planning and other noninvestment guidance5

The four response choices for each aspect were: very valuable, somewhat valuable, not very valuable, and not at all valuable.

Of the 5,176 people who participated in our study, 3,544 answered this question. (The other 1,632 people were not asked this question because they indicated they would not consider paying for advice.)

Our objective was to learn:

  • What aspects of financial advice are most valued by people who have saved for retirement.

  • Whether aspects of advice are associated with savers choosing to pay for advice rather than just considering paying for advice.

  • How demographic and financial characteristics, as well as other responses to our study, affect whether people pay for advice and how valuable they find different aspects.

Why Is It So Hard to Measure the Value of Financial Advice?

Researchers estimating the value of advice have arrived at a wide range of numbers, from roughly 1.6% to over 3% of assets annually. And they acknowledge that the value someone realizes depends on many factors. Here are a few reasons it is a challenging exercise.

  • Some aspects of advice are relatively quantifiable (e.g., benefits of rebalancing), whereas others are very difficult to measure (e.g., the value of peace of mind that ongoing advice may provide).

  • There is no industry-wide consensus on how to categorize different aspects of advice. For example, some researchers use broad categories such as “financial planning,” whereas others break out services such as tax planning and retirement planning. In addition, there can be considerable overlap between categories, particularly with an aspect such as taxes that touches many other areas.

  • The value of advice can vary widely by individual. Tax planning is an obvious example—the value depends heavily on income, wealth, and types of investments or accounts. The value of less quantifiable aspects such as goal setting or behavioral coaching might depend on personality, temperament, and other personal characteristics as much as on financial circumstances. An individual’s financial acumen can also affect the value.

  • Services provided by financial professionals also vary widely.

1Examples include Vanguard, Morningstar, Michael Kitces, Envestnet, and Russell.
2The Retirement Savings and Spending Study was conducted online June 9–August 4, 2021, and 3,844 participants who are currently contributing to a 401(k) plan or are eligible to contribute and have a balance of at least $1,000 responded. The survey also included 1,332 retirees who have retired with a Rollover IRA or left-in-plan 401(k) balance. Note that this group is not necessarily representative of the general population.
3These aspects were based on a combination of prior industry research, proprietary qualitative research, CFP Board knowledge topics, and our judgment.
4Respondents could also choose to see additional clarification for this aspect: “This includes the choice of funds, stocks, bonds, and other investments appearing on your account statement.”
5Respondents could also choose to see additional clarification for this aspect: “In addition to estate planning, this includes insurance decisions, college funding, employee benefit and stock compensation evaluation, real estate decisions, charitable giving, and small business planning considerations.”

Important Information

All investments are subject to market risk, including the possible loss of principal.

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

This information is not intended to reflect a current or past recommendation concerning investments, investment strategies, or account types, advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Please consider your own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

The views contained herein are those of the authors as of September 2023 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

All charts and tables are shown for illustrative purposes only.

View investment professional background on FINRA's BrokerCheck.

202412-4072524

 

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