WHAT'S ON OUR MINDS

The value of fiduciary counsel is 4% annually

March 29th, 2017 | Markets, Planning | North Forty Two

Investment manager.  Financial planner.  Business advisor.  Behavioral coach.  Life counselor.

We wear a lot of hats for our clients, and we can deliver a tremendous amount of value for what we charge (and don’t charge!) for those services.  One question that occasionally arises is how to quantify that value in real terms versus our fees, which between advisory and implementation costs fall below 1% annually, all-in.

Our friends at Russell Investments have made an attempt to put a price tag on some of those activities in a recent blog post.  In their estimation, a fiduciary – the role we have embraced for two decades – adds over 4% in annual value to their clients’ portfolios.

Russell breaks down that 4% (well, the precise figure is 4.04%) as follows:

 

 

We can quibble about some of the calculations – for instance, our views on portfolio rebalancing are less systematic and more tactical than a Russell approach.  However, the statistic that stands out is the 2% annually that is lost by investors due to the impulsive behavioral inclinations of chasing past performance that we, as professional money managers, are acutely aware of.  In graphic form:

 

 

Why does this matter?

Future investment return expectations are decidedly low compared to historical assumptions.  Relatively modest single-digit returns are the forecast for a number of well-respected institutions, including BlackRock:

 

 

With muted return expectations for financial assets, the value of prudent fiduciary services – avoiding behavioral mistakes, using efficient investment instruments, making wise tax decisions, and implementing a financial plan – really stands out.  When markets are periodically and temporarily racing at double-digit levels, 4% may not seem like much.  But with modest 4%-6% forecasts for equity markets and balanced portfolios over the near-term, leaving an additional 100% of value on the table feels much more meaningful.