The value of an advisor: 3 ways wealth managers save Americans money

May 16, 2023 6:44 PM

Americans who work with financial advisors can save significant amounts of money, a Russell Investments study found.

In today's volatile economy, many Americans feel they can't afford to work with a financial advisor. A new study shows why they can't afford not to.

Russell Investments, an international investment firm headquartered in Seattle, has gathered data from the past decade — including the brutal markets of 2022 — to show why sound financial advice is more important than ever. For any advisor trying to recruit a new client or keep an old one, the study outlines what could be a very persuasive pitch.

"Sometimes advisors don't have the confidence in the value that they really bring to clients," said Tina Downing, senior director of advisor and intermediary solutions at Russell Investments. "And this was really one of the reasons we created this study: to help them think through all the things that they actually do for their clients and be able to articulate that."

To put it mildly, the economy of the 2020s has been hard to navigate on one's own. In 2022, the S&P 500, Nasdaq and Dow Jones all suffered their worst years since 2008, with the S&P down 19.4%.

And in a historically rare combination, bonds suffered at the same time. The Barclay's U.S. Aggregate Bond Index, for example, was down 13% by the end of 2022 — its worst year on record.

At the same time, both inflation and interest rates have soared. In the first half of 2022, the yearly increase in the consumer price index jumped to 9.1%, its highest point in four decades. To bring that down, the Federal Reserve has raised the federal funds rate to more than 5% — the highest it's been since 2007.

Despite all these challenges, few Americans have turned to financial advisors for help. Only 35% of U.S. adults worked with a wealth manager in 2022, according to a report by Edelman Financial Engines, a financial services company in Santa Clara, California.

Russell Investments makes the case for why the other 65% should reconsider. Here are three of the key benefits of working with a financial advisor, as highlighted in the study:

Rebalancing portfolios

At a time when the economy is in constant flux, it's not always possible to "set it and forget it." An investor can carefully purchase a certain ratio of assets to suit their needs, but without vigilantly readjusting it now and then, that ratio will change over time.

For example, Russell Investments calculated what would happen if someone in 2009 invested in a traditional 60/40 portfolio — 60% stocks, 40% bonds — and then never touched it. By 2022, thanks to the long bull market of the 2010s, that same portfolio would be 82% stocks and 18% bonds. An originally risk-averse set of investments would now be risk-heavy.

That's why rebalancing is so important. For a portfolio to continue matching the risk tolerance, goals and timeline of the investor, it must be periodically readjusted. And investors often need a professional's help to do that, because it can be difficult — both financially and psychologically.

"With investors left to their own devices, many times they don't actually rebalance," Downing said. "And why is that? Because it requires them to do something completely opposite to our emotional tendency: It requires us to sell what's doing well and buy what's not doing as well."

Behavioral coaching

Investing can get emotional, especially in times of volatility. One of the most important tasks for a financial advisor, Downing said, is to persuade investors to stay the course even as the world appears to be crumbling around them.

"If you think about traditional finance, it assumes certain things: that clients are rational, that they have all the information that they need, that they're able to assimilate that information," Downing said. "But in reality, we know that there's this roller coaster of emotions that happens with clients over the years."

Succumbing to those emotions can come at a cost, which Russell Investments attempted to quantify. The study found that if a client invested $100,000 in the S&P 500 in 2012, by 2022 their portfolio would be worth $326,540 — if the investor rode out every storm in between. On the other hand, if they missed the 10 best days of the market, they would only have $178,702. And if they missed the 30 best days, they'd only have $99,815.

Financial advisors can help clients avoid making this kind of mistake.

"One of the biggest advantages of having a financial advisor is [they] help investors make a plan and stick with that plan," said Katherine Edwards, a certified financial planner at Main Street Financial Planning in Murfreesboro, Tennessee. "So when — not if — the markets are volatile, they won't be reactive to the emotions and fear that go along with an uncertain economy."

Read: 5 tips to overcome behavioral bias in investment strategies

Tax planning

Wealth managers can also help enormously with taxes. First and foremost, they can help clients file correctly and punctually, sometimes by collaborating with certified public accountants. Ron Strobel, the founder of Retire Sensibly in Meridian, Idaho, has found this especially important for his older clients.

"As clients age, it can be incredibly valuable to have an advisor who simply helps them organize their tax documents each year," said Strobel. "We often see retirees who have failed to file their taxes for several years in a row due to age-related issues like Alzheimer's or the death of the spouse who took care of the finances … The advisor can play that critical role of making sure everything is filed on time."

But there's also another way advisors can help — long before tax day. By helping to choose assets that won't be heavily taxed, wealth managers can set clients up for much lower tax bills in the future.

For example, Russell Investments calculated that if an investor had a portfolio worth $500,000 at the end of 2022 — based on a hypothetical set of mutual funds and exchange-traded funds — they would likely end up owing a capital gains tax of about $7,000. On the other hand, if that portfolio had contained tax-managed mutual funds, the investor could have avoided capital gains distributions completely, and therefore owed $0 in capital gains tax.

Downing believes this is an area where financial advisors provide a great deal of value for their clients, even if it's sometimes overlooked.

"If you think about this whole process, it's not just what they earn on their investments," she said. "It's what they keep."