Vanguard Measures the Emotional Value of Financial Advice

Research examines investors' perceived value of financial advisors and robo-advisors

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Apr 01, 2020, 10:15 ET

VALLEY FORGE, Pa., April 1, 2020 /PRNewswire/ -- Emotional elements, such as trust and personal connection with an advisor or advisory service, account for about 40% of investors' perceived value of financial advice, according to new Vanguard research. In the paper, The value of advice: Assessing the role of emotions, researchers estimate that the balance of the perceived value of advice—about 60%—is attributed to functional aspects of the advisory relationship, such as portfolio management and financial planning.

Using a research design inclusive of interviews and a survey, the researchers studied the role of 24 key value attributes on advised investors' perceived value of advice. Each of these attributes is characterized as either emotional (e.g. "trusting that the advisor will put my needs first" and "having a personal connection") or functional (e.g. "balancing saving and investing" and "maximizing investment returns").

Among traditionally advised investors, the components of a financial advisor's value are organized around two themes—relationship with a trusted advisor and service. A relationship with a trusted advisor comprises designated emotional attributes including trust, personal connection, and proactive outreach, as well as functional attributes, such as constant plan monitoring, expert perspective, and visibility of portfolio changes. Service, on the other hand, represents functional attributes, such as developing a customized financial plan, maximizing investment returns, and third-party financial mediation.

"Advisors need to understand what their clients value—and conversely, what they don't—so they can prioritize the most meaningful aspects of their relationships. In good markets and in tough markets like now, this enables them to foster trust and provide services that resonate," said Tom Rampulla, managing director of Vanguard Financial Advisor Services. "The business benefit of this study for advisors is tangible, as trusted advisors receive increased client loyalty, incremental growth in managed assets, and lower levels of client attrition."

In their analysis of robo-advised investors, the researchers identified three themes that comprise the perceived value of all-digital advice services: transparency, empowerment, and interaction with the service. Key value attributes include trust, constant plan monitoring, time delegation, knowledge of fees, having a customized financial plan, and the need for control.

"Our research demonstrates that the attributes that drive the emotional value of advice are dependent upon the type of advisory service an investor uses," said Anna Madamba, senior researcher in Vanguard Investment Strategy Group and co-author of the paper. "While we observed that most of the perceived value among traditionally advised investors lies within the relationship with their advisor, the emotional elements among robo-advised investors are focused on providing a sense of accomplishment and control."

The study also found that the majority of advised investors are not knowledgeable on advice costs. While most of the respondents knew how they were paying for advice, less than half knew how much they paid.

"This lack of investor comprehension in regards to how much they pay for advice highlights an opportunity for the industry to disclose fees in a more clear and transparent manner," said Cynthia Pagliaro, senior researcher in Vanguard Investment Strategy Group and co-author of the paper. "Cost transparency would greatly benefit advisors as it would enable them to better articulate the value of their service to clients in relation to the fees they charge."

Vanguard has long believed in the value of advice, whether it is delivered directly from Vanguard or through independent financial advisors, retirement plans or consultants. The firm's advice thought leadership, notably including the Advisor's Alpha research series, complements its advisor resources that include tools, model portfolios, and additional services designed to support advisors, help them grow their businesses, and better meet their clients' needs.

This is the third installment of the "Value of Advice" series. An initial paper published in September 2019 introduced a three-part framework—portfolio, financial, and emotional outcomes—for more comprehensively assessing the value of advice. In the second paper, published in February 2020, researchers focused on portfolio outcomes. A final paper examining financial outcomes is slated for publication later this year.

About Vanguard
Vanguard is one of the world's largest investment management companies. As of February 29, 2020, Vanguard managed $5.9 trillion in global assets. The firm, headquartered in Valley Forge, Pennsylvania, offers 425 funds to its more than 30 million investors worldwide. For more information, visit vanguard.com.

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SOURCE Vanguard