SmartAsset calculates financial advisor’s value

Financial advisors seeking a quick way to show prospective clients how their services pay for themselves many times over can use a new online tool calculating that dollar value.

The “Financial Advisor Value Calculator” launched last month by lead generation and investor matchmaking service SmartAsset takes some basic information about age, income and retirement to estimate the difference in a client’s final net worth, based on whether or not they worked with an advisor. Through assumptions about inflation, investment returns and a few other factors, and a formula that the company developed in a prior study, the tool offers a quick answer to a question on the minds of many potential clients, said Jaclyn DeJohn, a certified financial planner who is SmartAsset’s director of economic analysis.

READ MORE: Fee compression is coming, Cerulli says. Here’s how to get ahead of it

Closing the loop

Through feedback channels like an “ask an advisor” inbox and monthly meetings with consumers on “the potential pain points,” SmartAsset often hears from clients wondering whether advisors are worth their cost in terms of both their fees and the time spent with them in meetings and filling out documents, DeJohn noted.

“People want to be sure of the value or the ROI that they’re going to get. Being able to put the value on there, I think, is really valuable to drive people on the fence to further explore things,” she said. “Exposing those areas of expertise and bucketing them all into a final dollar value can be really valuable messaging when you have only a few moments to get your message across.”

The study authored by DeJohn earlier this year arrived at a figure of 2.39% to 2.78% higher annual rate of return for clients who work with advisors — roughly similar to Vanguard’s annual Advisor’s Alpha report, which puts the value at about 3%. SmartAsset intends to follow up on the new consumer-facing calculator with a version that advisors can use through their own firms. Its compliance teams have vetted the tool to ensure it’s in line with industry rules.

READ MORE: What’s wrong with the big RIA model, straight from advisors’ mouths

Grains of salt and kernels of truth

With fee compression as a dominant theme of recent decades in investing and a continuing force today, many planners have embraced alternative business models and thought carefully about the ways that clients may fail to understand the full equation or respond to the need to charge higher costs in some cases. Experts (and online commenters) point out there are any number of specific circumstances and statistical criteria that could affect the numeric value of advice, portfolio management and financial planning. 

That means the existence and range of the numbers matters more than, say, the exact numeric finding that this reporter’s final net worth would grow by more than $284,000 by hiring an advisor. Furthermore, the tool includes the relevant legal disclosures and discussions about the methodology, with links for further reading.   

For advisors and their teams, the important takeaway from such numbers comes from expecting and fielding fee queries from the prospective clients and the large values from the behavioral coaching underlying their advice. In times of volatility, advisors can help clients “have a longer time horizon” and avoid “knee-jerk decisions” that cost them, said Mike Byrnes, the founder of advisory practice growth firm Byrnes Consulting.

“Sometimes people are too quick to pull the rug out of their portfolios, so to speak, so they can miss a lot of the upside,” Byrnes said. “There’s a plan, and they need to stick to it to get to the retirement goals that they want.”

READ MORE: Solo advisors can thrive in a consolidating industry. Here’s how

The next iterations

The tool could aid advisors in explaining how their comprehensive services deliver more value than the cheaper technology tools that do basic asset management or other competitors who are transactional salespeople. That’ll be especially true once registered investment advisory firms and other wealth companies can embed it directly on their websites, DeJohn said.

“Some of the feedback we’ve gotten from advisors is that there’s large interest in making somewhat of a B2B version of this,” she said. “Firms want to be able to distinguish their own alpha versus other firms.”