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Valuing advice

Know the three-part value framework for classifying how investors consider the importance of financial advice.

Valuing advice

Valuing advice: The investor perspective

One can calculate how much value an advisor adds to a client's portfolio by helping them make smart decisions and avoid financial mistakes. And then there's how much value a client perceives their advisor to contribute. While the latter, perceived number may lack as much precision, it can be just as important as the first. Our research teased out the emphasis investors place on emotional, portfolio, and financial value they place on financial advice. And, importantly, we detail how much of their financial achievement they attribute to advice.

Role of wealth

Why human advisors have an advantage with wealthy clients

Vanguard breaks down the nuances in the relationship between clients and either their digital or human advisors in its most recent survey1 of over 1,500 investors. One of the most insightful pieces of information is the role of financial complexity in selecting an advisor.

There is a strong age demographic disparity between digital and traditional clients, with younger investors relying more on digital advice. For now, millennials have simpler portfolio construction and financial goals than older generations. But, generally speaking, as clients age and grow wealthier, both of these increase in complexity. Portfolio rebalancing, purchasing a second home, preparing for retirement, and navigating taxes all require more time, willingness, and ability for an investor to address.

In fact, clients with traditional advisors are, at a minimum, 20% less likely to have that time, willingness, and ability in managing their portfolios. This explains the high peace of mind clients say they have when paired with human advisors. Thus, advisors can pitch themselves as a way to navigate complexity, save their clients time, and improve their portfolios.

Putting it into practice

Recognize the relationship between the complexity of investors' needs and your ability to deliver increasingly higher value. Explain to clients that as their assets grow, their financial lives will become more complex—and that you can help them graduate to customized advice better suited to personal interaction. Human advisors can get the assistance they need from digital advice tools, to help offset the complexity of clients' financial goals.

Capability to manage own investments, by type of advice used

IVOA time willingness ability graphic

Note: In this figure, the sample includes all respondents. In total, 1,352; 1,354; and 1,351 human-advised clients and 341, 338, and 340 digital-advised clients answered the questions of whether they had the time, willingness, and ability, respectively, to manage their investments. They could rate the statements from 0 ("Not at all agree") to 10 ("Completely agree"). They were considered to agree with the statement if their rating was between 8 and 10.

Sources: Vanguard, 2021.

Role of age

No, millennials don't want robos more than other generations

In a divergence from common expectations, various demographics show almost the same preferences when it comes to how they want their advice delivered. Vanguard surveyed 1,500 investors as to their perceptions of robos and human advisors.1

Unsurprisingly, robos were preferred for tasks that can be automated, whereas human advisors were preferred for advice activities with a greater emotional component. What was surprising is how similar the results were, not only across wealth brackets but also across different generations.

Mass-affluent, high-net-worth, and ultra-high-net-worth investors had highly correlated scores for the rankings. This means that there was little difference, by wealth level, in preference between robos and human advisors.

And contrary to popular headlines, millennials are every bit as partial to traditional advisors as Gen X and baby boomers. In the end, the data suggest that advisors don't need to tailor their delivery method of services to specific generations or wealth levels.

Putting it into practice

A dual-track approach to financial advice is remarkably robust across demographics, recommending the use of technology as a tool to enhance, not replace, traditional advice.

Adding value

What's the difference? Traditional advisors' value add

Quantifying the exact value advisors bring to their clients is difficult. However, an extensive study1 from Vanguard was able to specify investors' perceived value of financial advisors.

Investors in the survey believe they are 16% closer to their financial goals with a human advisor than they would be without an advisor. This number dwarfs the perceived added value of digital advice, where clients report finding themselves a mere 5% closer to their financial goals.

In dollar terms, this means that a client believes a human advisor adds $160,000 in value to a $1 million portfolio goal. Comparatively, the client believes a robo advisor adds $50,000 to their portfolio. Additionally, investors are more likely to have a human advisor the older they become, which means that advisors are potentially navigating more complicated situations such as retirement, home ownership, and different tax scenarios. These advisors are providing crucial expertise that clients find indispensable in the management of their portfolios.

Putting it into practice

Advisors provide substantial value to investors' portfolios and outperform digital advice in the eyes of clients. Advisors can leverage this to inform conversations with clients as those clients' financial needs grow increasingly complex.

Investors believe both human and digital advisors provide high financial value

Perceived financial value (thousands)

IVOA advisors provide financial value graphic

Note: In this figure, the sample for human-advised and digital-advised clients includes all clients who responded to the question (which asked about their perception of an advisor's contribution toward reaching their financial goal). In total, 835 human-advised and 238 digital-advised clients met this criteria. The median financial goal for both human-advised and digital-advised clients is $1,000,000.

Sources: Vanguard and Escalent, 2021.

Financial Value

Financial value: Clients give human advisors higher marks

Value is about more than the added dollars and cents that an advisor brings to the table. Financial value is central to the case for a traditional advisor, and it is the ability to not only understand their client's financial goals but also create a plan that can achieve them.

Vanguard's survey of 1,500 investors finds that traditional advisors are more capable of meeting their client's financial goals, which in turn leads to higher loyalty and more peace of mind. On average, human-advised clients report higher percentages of achievement of their financial goals: While robo-advised clients report 5% of added value from their service toward achieving financial outcomes, human-advised clients perceive themselves as 16% closer to their goals because of their advisor.

Financial advisors are well-suited to bridge the gap between goal formation and achievement because of investors' confidence in their financial value.

Putting it into practice

Traditional advisors should focus their efforts on their core competency—their ability to steer investors toward their goals.

Portfolio value

How do advised clients view their portfolio performance?

Investors with both digital and traditional advisors believe that the advice they receive provides substantial value to their portfolios. While the way investors perceive and compartmentalize this advice varies drastically between the robo-advised and the human-advised, they see additional benefits of having an advisor.

A Vanguard study1 of more than 1,500 investors crystalized how they view the advisor edge. Investors were surveyed as to what their returns were in the last three years, and where they believed they would be without an advisor.

On average, robo-advised clients say they experience average, overall portfolio returns of 24% over the past three years, with their digital advisor responsible for returns of 3%. In other words, robo-advised clients believe that their robo advice is responsible for almost 12.5% of the return in their portfolio, with the remaining portion being what they would have received without an advisor. Investors with human advisors see a bigger advantage to having an advisor. They consider advisors responsible for 5% of their portfolio returns out of a total estimated 15% average, three-year return. Put another way, they attribute nearly a third (33%) of their returns in the last three years to a traditional advisor.

Putting it into practice

When it comes to portfolio performance, both robo-advised and traditionally advised clients see the value advice brings to the table, but much more so in the case of human advised-clients.

Investors believe human and digital advisors provide substantial portfolio value

IVOA advisors provide portfolio value graphic

Note: Respondents were asked, "In your experience with your human (or digital) advisor, what would you estimate your average annual investment returns to be in the past three years? If you have not had an advisor for three years, think about the relationship you have had with your advisor thus far." Respondents were also prompted to estimate their average annual investment return while working with their human (or digital) advisor. They were then told to imagine they did not have their advisor and instead managed their investment on their own. Given those circumstances, they were asked, "What would you imagine your average annual investment returns to be in the same period?"

Sources: Vanguard and Escalent, 2021.

Emotional value

The emotional value of a human advisor

Vanguard has reaffirmed the advisor's role in the investor's financial future by identifying the peace of mind and excess value that they bring to their clients. By surveying over 1,500 investors,1 we found that a human advisor's edge is providing a personal experience for their clients. Robo advisors simply can't compete with that kind of connection.

Investors trust their advisors' expertise in navigating financial markets and meeting their interests. They feel listened to and understood by human financial advisors as compared to digital advisors. One of the most effective ways advisors accomplish this is by being empathetic to their clients' personal financial needs and economic situations. This emotional connection in turn helps advisors address their clients' goals and steer them toward retirement in a highly personal manner.

The result? A higher overall satisfaction rate with human advisors. Human-advised clients have a very high 84% satisfaction rate as compared to the 77% satisfaction rate with digital advice. Investors' satisfaction stems from clients entrusting advisors with more responsibility in their portfolios because of the emotional value they bring.

Putting it into practice

In order to optimize their practice, advisors can allocate more of their time to their clients' emotional needs while employing digital services in areas that are more automatable.

Vanguard Research
Quantifying the investor's view on the value of human and robo advice

Examine Vanguard's complete findings into investor's perceived value of advice by reading the research report quantifying the investor's view on the value of human and robo advice.

Learn more about our three themes

 

Have more questions? Contact a representative.

Disclosures and footnotes

1 Paulo Costa and Jane Henshaw. 2022. Quantifying the investor's view on the value of human and robo-advice. Valley Forge, Pa.: The Vanguard Group.

Notes:

All investing is subject to risk, including the possible loss of the money you invest.