A couple of issues ago, my Inside Information newsletter talked about the new Four Factor client service model--NOT the four-factors of investment return you find in the academic literature, but four components of the financial planning service that advisors will offer in the future. Only one of them is investment management, even though, today, investment management seems to get the bulk of attention.
One of the points of the article was that the time and energy that the advisor focuses on the client produces far more terminal wealth for that client than anything you can get from the traditional investment management services.
How do you quantify that? A really astute investment manager might be able to beat the indices by one percentage point a year, and, of course, even that is extremely rare. But if the advisor keeps the client from doing what virtually all investors do--moving money in and out of the market, buying high and selling low, putting money into hot funds as they cool off... Well, the various Dalbar, Morningstar and JP Morgan studies suggest that, based on money flows into and out of all the mutual funds, the average investor generally gets about half the return of the market as a whole.
If you can help your clients just get market returns, you're adding between three and five percentage points a year to their return.
Plus, a study by Gobind Daryanani, published in my newsletter and elsewhere, shows that systematic rebalancing adds between 35 and 50 basis points a year to overall returns. And Daryanani and others have shown that tax management of client portfolios can add 50 to 100 basis points a year over the long term. Controlling expenses, substituting ETFs for the more expensive actively-managed funds, can add more.
And if you can boost a client's savings rate from the normal roughly 0-2% to something closer to 7% to 10%, that results in a greater increase in terminal wealth than all those other things combined.
Some of this has been quantified by an advisor who is working on an article that he'll submit to Financial Planning magazine later this year, and more research is being conducted as you read this by a university department devoted to financial services research and analysis.
And, of course, this is only one of the four factors of what I think will become the expanded service model of the future.
This is potentially a huge breakthrough. I think the planning profession is on the cusp of doing something it has never done before: communicating the value of the actual financial planning work to clients and prospects, and showing how much more terminal wealth it offers than the pure asset management activities.
And when you include the other factors, the profession will be able to measure and quantify benefits in areas that clients value even more in their personal and professional lives.
As you read this, I'm doing interviews and exploring exactly how to add the other "factors" to your service menu. But I'm curious about the ways that you're exploring other non-investment services with clients, and whether you've found your own way to communicate their value.
Share with us your most valuable non-investment-management-related service. Maybe in the future, instead of talking about four factors, we might end up offering five or six--and the value proposition of the future will be that much richer and easier to communicate.