What the Evidence Says

It is a fair question, and one every investor should ask before paying anyone a fee: does an advisor actually earn their keep?

At IFA, we have never argued that the answer lies in beating the market. The evidence on that point is overwhelming and runs the other way—markets are highly efficient, and the persistent forecasting of stocks, sectors, or interest rates has historically been a losing game. So if an advisor adds value, it cannot be by predicting what the market will do next.

The good news is that a growing body of research has measured where the value actually comes from. Eight studies, conducted independently by firms and academics with different methods and different data, generally point in the same direction. None of them meaningfully credits stock-picking. Each highlights factors that an evidence-based advisor is designed to deliver: discipline, structure, tax efficiency, and the behavioral coaching that keeps a long-term plan intact.

Two Frameworks That Put A Number On It

The best-known measurement comes from Vanguard, whose Advisor's Alpha research—quantified in the paper Putting a Value on Your Value—estimates that a disciplined advisor may add about three percentage points per year in potential net value added. Vanguard is careful, and so should we be, in describing that figure. It is potential value, not a guaranteed line on a quarterly statement. It is lumpy. It shows up most dramatically during periods of market panic or euphoria, when an advisor's steadying hand is worth the most. And the single largest component of it is not investment selection at all—it is behavioral coaching. 

Russell Investments reaches a strikingly similar conclusion through a different door. Its 2024 Value of an Advisor study quantifies the contribution at approximately 3.52% per year in estimated value added, using an "A B C T" framework: active rebalancing and asset allocation (0.28%), behavioral coaching (1.43%), customized family wealth planning (1.13%), and tax-smart planning and investing (0.68%). Notice that the biggest single piece, once again, is behavioral coaching. The two firms used independent methods and landed within half a percentage point of one another, with the same item at the top of the list.

The Behavior Gap Is Real—And It Is The Point

If behavioral coaching is where most of the value sits, it is worth asking what it is protecting investors from. Morningstar answers that in its annual Mind the Gap study. Over the ten years ending in 2022, the average dollar invested in U.S. funds earned roughly 6% per year, while the funds themselves returned about 7.7%—a shortfall of about 1.7 percentage points per year, or close to a fifth of the available return. The gap is generally attributed to investor behavior, such as buying after periods of strong performance and selling after declines. Morningstar has found a gap in the same neighborhood across multiple ten-year periods, and DALBAR's long-running research tells a similar story. This is the recurring, self-inflicted cost of trying to time the market—and helping to reduce it is one role a financial advisor may play, depending on individual circumstances.

Planning Is Where The Largest Gains Hide

Two of the studies focus on the decisions that surround the portfolio rather than the portfolio itself, and they may be the most striking of the group.

Morningstar's Gamma study, by David Blanchett and Paul Kaplan, examined five retirement planning decisions—sensible asset allocation, a dynamic withdrawal strategy, tax-efficient asset location, the appropriate use of guaranteed income, and liability-aware investing. Getting those right, they found, was estimated to potentially produce, under certain circumstances, roughly 29% more retirement income under certain assumptions, the equivalent of adding about 1.6 percentage points of return every year—without necessarily taking on additional market risk. That value is attributed in the study to better planning rather than forecasting.

Vanguard's work on the spending phase makes the same case from the tax angle: simply sequencing withdrawals across taxable, tax-deferred, and tax-free accounts in the right order—rather than the intuitive but costly default—can meaningfully extend the life of a portfolio. Tax-smart planning is unglamorous and entirely controllable, which is exactly why it is so often left on the table.

Diversification, Lower Risk, and Greater Confidence

The remaining studies round out the picture. A broad body of academic research, including work published through the Centre for Economic Policy Research, finds that, in certain studies, advised investors have tended, on average, to hold more diversified portfolios and take on less uncompensated risk than investors going it alone. Research associated with the Retirement Income Institute points in the same direction—planning users in some studies achieving comparable or higher returns without necessarily accepting more risk, which is simply efficient portfolio construction doing its job.

Hearts & Wallets, which studies the behavior of real households, adds the human dimension: investors who plan have tended, in certain studies, to save more, allocate more sensibly, and…feel more confident about their financial lives. That confidence is not a soft benefit. It is what allows an investor to stay seated through a downturn instead of capitulating at the worst possible moment, which loops directly back to the behavior gap.

Eight Studies, One Conclusion

Read together, these studies make a coherent and, frankly, an unsurprising case. The value of an advisor does not come from a crystal ball. It comes from building a globally diversified, low-cost portfolio; rebalancing it with discipline; withdrawing from it in a tax-aware sequence; planning around an entire financial life; and—above all—coaching investors to stay the course when their instincts are screaming at them to do otherwise.

That is not a sales pitch. It is a description of what an evidence-based advisor is for. At IFA, this reflects the approach we seek to implement, grounded in the same academic foundation—the efficient market hypothesis, the science of diversification, and decades of data—that these studies draw on. The market has historically rewarded patient, disciplined investors, although outcomes are not guaranteed. The hardest part is remaining one. That, more than anything, represents the potential value an advisor may provide.

Sources: 

• Blanchett, David, and Paul Kaplan. "Alpha, Beta, and Now… Gamma." The Journal of Retirement 1, no. 2 (Fall 2013): 29–45. [jor.pm-research.com]
• Morningstar. Mind the Gap 2023: A Report on Investor Returns in the United States. July 2023. [assets.con...ntstack.io]
• Russell Investments. 2024 Value of an Advisor Study. Russell Investments, 2024. [thefreelibrary.com]
• Vanguard Group. Putting a Value on Your Value: Quantifying Vanguard Advisor's Alpha. Vanguard, 2022. [vanguardso...merica.com]
• Centre for Economic Policy Research. [Research publications]. London: CEPR.
• Retirement Income Institute. [Research publications].
• Hearts & Wallets. [Market intelligence and research reports]. [heartsandwallets.com]

Disclosures: