The conventional math behind what advisors can charge is far off the mark, according to a new analysis cited by Trust Advisor. As a result, the publication contends, advisors can charge or reinvest much more than previously thought.
The analysis by Envestnet found that the belief that advisors can’t charge above 100 basis points without losing clients is wrong, and it showed that advisors beat market benchmarks by an average of 3% a year. Tax savings provided by financial advisors are the biggest benefit, adding up to more than 100 basis points over the broader market annually from 1995 to 2014, according to simulations Envestnet performed on a tax-sensitive portfolio employing techniques such as loss harvesting and variable holding periods, Trust Advisor reports.
A further 44 basis points of added value came from regular rebalancing of the portfolio, Envestnet’s analysis found — while another 28 basis points were won with asset allocation. And Trust Advisor points out that both services are relatively inexpensive to offer to clients through automation.
In addition, selection of securities in each asset class brought an extra 82 to 85 basis points over the benchmarks, according to Envestnet — and Trust Advisor suggests delegating the research if it’s costing more “per dollar of” assets under management than what it brings for the client. Finally, financial planning brings a further 50 basis points in added value. With 300 basis points of total added value, advisors can use robots to do much of the work and translate the profits to clients and their own payouts, Trust Advisor concludes.