I recently spoke to a group of investors and my experience reinforced the common reporting that investor education is much needed in this country. However, this event made me realize a new impact of basic investor education, and the ripple effect which translates to an entirely new mis-understanding of the benefit of financial advisors.
During this talk I discussed the white papers from Morningstar, Vanguard, and Financial Engines/AON/Hewitt, each of which illustrate that financial advisors can deliver between a 2 and 3 percent increase in the annual return of a portfolio. Each report is full of caveats of course, but the big takeaway is that three very different firms came to very similar conclusions. For those in the financial industry, and those that are fluent in financial matters this is a very meaningful number. During my talk I was showing the data from each firm on a large screen, and exactly how they arrived at their respective numbers. As is common when one is speaking, you can often tell which points are making an impact on the audience and which are not. Up to this part of the presentation, there were a number of points I made where people reacted with interest, or surprise. However, when I got to the 2-3 percent part, I did not notice much of a reaction.
In the audience was a very close friend who came in part to listen to the presentation, but in large part to give me critical feedback on making my presentation better, as this presentation I have only given a few times prior. What my friend told me later totally shocked me: the part I thought would have the most impact, actually had the least! In fact, the perception of my friend was that everyone’s eyes glazed over. I asked why, and my friend said “well, its only 2-3% and I thought to myself, big deal”.
My friend and at least half of the group were fairly sophisticated people, so it was not them. And it was not the presentation per se, as I used the exact working and charts from each research firm. So what could the problem be? How could this audience of fairly sophisticated people not see the incredible impact of adding 2-3% to your annual investment performance? The answer is I only showed the feature of 2-3% and not the numerical benefit of say what 2% every year for 30 years means. What I should have shown was the actual dollars the average person will gain in their retirement plan by employing a financial advisor.
This same educational tactic is used often in the reverse, usually by index fund sponsors, or robo advisors or others showing the effect a percent of expenses saved has on your retirement plan. Nerd Wallet has an interesting article showing the cost of 1% to a portfolio and illustrating that a typical 25 year old will have over $590,000 more in retirement savings, or another way to look at it would be able to retire several years earlier than anticipated.
Looking at increasing your rate of return using popular return calculators like this one at American Funds illustrates that for the same typical 25 year old starting with $20,000 making small monthly investments, if their rate of return increases by just 2%, they have more than a $160,000 increase in savings over 30 years.
The lesson learned is that by showing the dollar amount of an advisors impact, coupled with the Morningstar, Vanguard and other reports, the investor will clearly see the benefit of having an advisor, especially if the advisor during his or her time with the client lowers the expense of the portfolio. In that scenario the amount increases to over $700,000 in increased savings. Percentages do not educate, dollars do however.
Nicholas W. Stuller 