The Value of A Holistic Approach to Financial Planning
New research shows a comprehensive approach can boost investment return over the long term.
Since our start in 1985, Mercer Advisors has firmly believed that investors have the most to gain by looking at their financial lives holistically – a mixture of investment advice, comprehensive planning, and life-driven goals. Recent research has put a value on this integrated approach.
Studies by Morningstar and Vanguard show financial advisers who provide wealth management best practices can add significant value beyond market performance. While the findings are hypothetical and are not actual investment results, both sets of research illustrate the value provided by comprehensive financial planning.
Our research shows that investors who follow best practices can earn an additional 1.50% to 3.00% annually. Splitting the difference between these statistics, Figure 1 shows how an additional 2.25% annual return could impact a portfolio over thirty years. (For illustrative purposes only.)
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The average investment portfolio return has an assumed average annual return of 6% compounded monthly. The return attributed to financial planning has an assumed average annual return of 2.25% compounded monthly.
Morningstar says smart financial planning can translate to 1.5% more in annual average returns. Academics at Morningstar recently coined the term Gamma to define the potential valued added to a portfolio from intelligent financial decisions. In a white paper titled Alpha, Beta and Now….Gamma the authors stated, “Getting Gamma from financial planning best practices offers a much more certain and consistent return than seeking traditional alpha from choosing outperforming mutual funds.” Morningstar identified more than 100 financial planning techniques that can serve as sources of Gamma. They focused on five for their study: total wealth asset allocation, annuity allocation, dynamic withdrawal strategy, liability relative optimization, and asset location & withdrawal sourcing.
Figure 2 shows how properly implementing these value-added strategies can increase returns by as much as 1.59% annually. Of the five strategies, a dynamic withdrawal strategy had the highest potential Gamma. In addition to the five factors, Morningstar found that making informed Social Security claiming decisions could increase returns by another 0.74% annually.
Vanguard finds working with an adviser can add up to 3% in net returns. Vanguard performed a similar study and concluded that financial advisers using wealth management best practices can add “about 3% in net returns” to their clients’ portfolios. Vanguard emphasized that while the value added will vary according to each client’s circumstances and from year to year, “It’s a number that is very real and can reinforce the importance of sticking to a plan and following sound financial advice.”
As detailed in Figure 3, clients can benefit from a qualified adviser who helps them invest in a low-cost, broadly diversified portfolio, maintain their target allocation, and draw down their savings tax efficiently. Successfully implementing all seven strategies can potentially add “about 3%” to an average client experience.
Notably, research finds that advisers can add the most value – “tens of percentage points of value-add, rather than mere basis points” – by helping clients stay the course during bear market lows and avoid performance chasing during market highs.
Best Practices at a Glance
Below are five strategies identified by this new area of best practices research. All of these potential return-enhancing strategies are practiced by Mercer Advisors:
Academic Portfolio Design
Research has found that asset allocation is the biggest driver of a portfolio’s return and risk. Best practice studies conclude that one of the advisor’s primarily responsibilities is to design a properly diversified investment portfolio tailored to each client’s personal needs, goals, and risk profile.
Ongoing Personal Guidance
Studies have shown that average investors often jump in and out of the market, buying at the euphoric highs and panic selling at the distressing lows. Not surprisingly, the returns the average investors earn on their investment portfolios are significantly lower than what the market offered. One of the most valuable services an advisor can provide is to help clients steer clear of money-losing ventures, like trying to time the market or chase returns.
Low-Cost Investing
Research has repeatedly documented that low costs lead to better investment performance. Advisers who implement investment plans with lower-cost funds can add significant value to their clients’ portfolios. Cost-effective implementation is especially important in times of low market returns, when fund expenses erode a higher proportion of returns.
Systematic Portfolio Rebalancing
A good financial adviser keeps the investment plan on track through systematic portfolio rebalancing. Regular rebalancing keeps positions within their target weights and enforces the discipline of buying low and selling high. Without guidance, many investors fail to rebalance their portfolios because it seems counterintuitive to sell winners and buy laggards.
Customized Distribution Planning
Research has shown the benefits of adjusting distributions based on the investment climate and a client’s remaining life expectancy. Advisers utilizing variable withdrawals strategies can help maximize how long their clients’ savings last. Customized distribution planning allows investors to increase spending during good markets, without having to cut back as much in down markets.
David has served as CEO of Mercer Advisors since 2008. He is responsible for the firm’s strategic vision, business plan execution, and organizational structure.
-
'The 'Mamdani Effect' in New York: Can the City Afford a Millionaire Tax?State Tax Will higher income taxes drive the wealthy to flee New York in 2026?
-
The November CPI Report Is Out. Here's What It Means for Rising PricesThe November CPI report came in lighter than expected, but the delayed data give an incomplete picture of inflation, say economists.
-
Online Banks Still Lead on Rates, But Is Switching Worth it Now?As interest rates trend down, online banks keep an edge on yields, but service, access and flexibility still matter. Here’s how the trade-offs stack up.
-
5 Smart Things to Do With Your Year-End Bonus, From a Financial ProfessionalAfter you indulge your urge to splurge on a treat, consider doing adult things with the extra cash, like paying down debt, but also setting up a "fun fund."
-
Are You a Gen X Investor? Here's How You Can Protect Your Portfolio From an AI BubbleAmid talk of an AI bubble, what's the best course of action for investors in their 50s and 60s, whose retirement savings are at risk from major market declines?
-
Hey, Retirees: Put Your Charitable Gifts in a Donor-Advised Fund (and Enjoy Your Tax Break)A donor-advised fund is a simple (really!), tax-smart strategy that lets you contribute a large, tax-deductible gift now and then distribute grants over time.
-
If You're a U.S. Retiree Living in Portugal, Your Tax Plan Needs a Post-NHR Strategy ASAPWhen your 10-year Non-Habitual Resident tax break ends, you could see your tax rate soar. Take steps to plan for this change well before the NHR window closes.
-
Your Year-End Tax and Estate Planning Review Just Got UrgentChanging tax rules and falling interest rates mean financial planning is more important than ever as 2025 ends. There's still time to make these five key moves.
-
What Makes This Business So Successful? We Find Out From the Founder's KidsThe children of Morgan Clayton share how their father's wisdom, life experience and caring nature have turned their family business into a respected powerhouse.
-
Past Performance Is Not Indicative of Your Financial Adviser's ExpertiseMany people find a financial adviser by searching online or asking for referrals from friends or family. This can actually end up costing you big-time.
-
I'm a Financial Planner: If You're Not Doing Roth Conversions, You Need to Read ThisRoth conversions and other Roth strategies can be complex, but don't dismiss these tax planning tools outright. They could really work for you and your heirs.
