Aon Hewitt, the global benefits consulting firm, analyzed 14 defined contribution plans representing over 723,000 individual participants over the seven-year period from 2006 through 2012 to determine how participant behavior affected portfolio risk and returns.  Their finding: those who sought help with their investments did significantly better than those who managed their portfolios on their own.

The research measured help in three ways: utilizing target date funds, hiring a financial planner to help manage investments, and utilizing online sources for advice.  They found that the median annual difference between investors getting help in any of these ways compared to those that did not was 3.32% net of fees over the seven-year period.  That may not sound like much, but the impact on wealth accumulation over time would be significant.  A 45-year old getting an extra 3.32% return annually on a portfolio returning 6%, for example, will end up with 85% more wealth at age 65.  In dollar terms, an investment of $100,000 growing at 6% would become $320,700 for the do-it-yourself investor.  For the person using investment help it would grow to over $594,000.

The company also found that investors hiring financial planners did better than those utilizing target date funds, but the difference was much smaller: about 0.50% annually net of fees.  Nonetheless, that difference still represents an additional 10% to our 45-year old’s retirement nest egg.

Of further interest is the fact that over 60% of those investors who were not getting help had inappropriate levels of portfolio risk, according to Aon-Hewitt.  Two-thirds of them were taking on too much risk, with some near-retirees (those over age 50) carrying more risk in their portfolios than that of an all-stock portfolio.  One good market downturn could threaten their ability to retire.  The remaining one-third had too little risk, jeopardizing their ability to accumulate sufficient retirement wealth.

This data is consistent with research by Vanguard (the mutual fund company) that determined that a good financial planner should be able to increase a client’s investment return by as much as 3% net annually.  In the Vanguard case the researchers broke down a planner’s advice into key elements and determined the potential savings.  Some of the areas showing the greatest benefit to investors included:

• Suitable asset allocation using broadly diversified funds/ETFs
• Cost-effective implementation (expense ratios)
• Rebalancing
• Asset location
• Behavioral coaching (maintaining investment discipline)

I have found that the discipline that a professional advisor brings to investors is probably the most valuable service he or she can provide.  During periods of market volatility our emotions work against us, pushing us to sell when things look bad and to buy when they look good (exactly the reverse of what we should be doing).  Overcoming such powerful stimuli can be daunting without help.  It’s good to know that someone has gone to the trouble to figure out just how much that help can be worth.

Here’s a link to the Aon Hewitt report:  http://corp.financialengines.com/employer/FinancialEngines-2014-Help-Report.pdf