The Value of Good Financial Advice
By James Parkyn - PWL Capital - Montreal
September marked 25 years since a milestone in the world of financial advice. In 2001, the investment firm Vanguard released its “Advisor’s Alpha” study—research that redefined what it means for advisors to add value for investors.
Rather than viewing success as beating the market, the study suggested that advisors should focus on helping investors with portfolio construction, financial and tax planning, and discipline.
Vanguard later quantified that finding to show the impact it could have. The firm found that advisors who use wealth management best practices can add up to 3% or more in net annual returns for their clients. That added value compounds significantly over many years.
The value comes not from trying to predict the next market move, but from guiding investors to make good choices to achieve their financial goals.
Where does the value originate?
Behavioural guidance–up to 2% or more
One of a good advisor’s most significant contributions is coaching investors, Vanguard found. During market swings, fear and euphoria can push investors toward rash actions that undermine their plans. A knowledgeable, experienced advisor can help clients hold steady when markets fall and avoid overconfidence when they rise.
Vanguard’s research shows that investors who stuck with a 50-50% stock-bond mix through the 2008 financial crisis enjoyed a 209% return by 2024—versus a 16% loss for those who moved fully to cash.
Those who held a mixed stock-bond portfolio through the Covid crisis gained 31%, while investors who went to cash lost 12%.
“These figures demonstrate how a diversified investor has fared well by sticking with a balanced portfolio even through severe market downturns,” Vanguard said.
“Moving to a more conservative allocation… is a natural response. However, while it’s understandable to want to alleviate immediate emotional pain and anxiety, deviating from one’s long-term asset allocation after market declines has proven detrimental to the portfolio’s long-term growth.”
Emotional circuit breakers
This is a key insight. Since Vanguard’s report came out in 2001, many advisors were persuaded to shift their focus more toward educating clients. This is a role we strongly embrace at PWL.
As Vanguard puts it, “Advisors acting as ‘emotional circuit breakers’ for their clients can prevent significant wealth destruction. Advisors have increasingly helped their clients understand the rationale behind their asset allocation, the potential outcomes and the inherent risks. By setting realistic expectations, advisors have helped clients be in a better position to ‘tune out the noise’ and reach their investment goals.”
Tax-loss harvesting—up to 1.5%
Advisors can add up to a 1.5% net annual return for clients through tax-loss harvesting. This involves selling investments that have declined in value to realize a loss, which can offset taxable gains. Those proceeds are then reinvested to maintain exposure to the market.
Investment selection and asset allocation—up to 1% or more
Advisors can add 1% or more for investors by devising a broadly diversified, low-fee portfolio based on the client’s goals and risk tolerance. The exact amount of value varies widely based on the investor’s portfolio.
A well-diversified mix ensures that investors get exposure to top market performers, while avoiding chasing yesterday’s gains. As we reported in a recent blog, a tiny portion of stocks—just 4%—was responsible for all stock market wealth creation from 1926 to 2023 above a risk-free investment in Treasury bills. Slightly over half of stocks lost money over their life.
We can’t know what the winners will be in the coming years, but we can get exposure to them by holding broad index funds that own all the companies in various market indexes. We can further diversify by holding a mix of US, international and domestic stocks, along with bonds.
Withdrawal strategy—up to 1%
How to spend from your portfolio is a crucial question. Whether for retirement or another purpose, a planned sequence of withdrawals can minimize taxes and help assets last longer.
Advisors can make a big impact for investors. Vanguard found that a coordinated approach can add up to 1% to annualized returns compared with random withdrawals, while reducing the risk of depleting assets too soon.
Rebalancing—up to 0.12%
Good advisors help investors by regularly rebalancing their portfolio back to its target allocation. Rebalancing trims positions that have grown too large and reinvests in those that have lagged. The idea is to keep portfolios aligned with goals and risk tolerance and ensure exposure to market winners.
This can add up to 0.12% in value annually, Vanguard found. It might seem like a small impact, but the value becomes significant when compounded over many years.
Instilling confidence
Vanguard’s figures are impressive, but I believe they capture only part of what great advisors deliver. Much of an advisor’s impact can’t be captured in percentages. It shows up in better investor decisions, reduced stress and the confidence needed to maintain the discipline key to financial success.
We at PWL take pride in our craft, and Vanguard’s research underscores why. It’s about helping people build perspective, resilience and wealth that endures far longer than any market cycle.
Find more commentary on personal finance and investing, our podcast, past blog posts, eBooks, model portfolios and market statistics on the website of PWL Capital’s Parkyn-Doyon La Rochelle team and our Capital Topics website.