Many blogs online explain the difference between direct and regular savings and how to save 1%. But this blog will have a fresh perspective.

We will discuss where you get the best value for your time, money, and long-term financial goals.

To make this relatable, let’s start with an everyday example.

Imagine you’re buying a new smartphone. You have two options:

1. Purchase it from online platforms or
2. Buy it offline

You compare prices and find the smartphone costs ₹1,000 less online. It seems like a straightforward choice. Buy it online and save money.

But if you buy from the local shop, you get additional perks:

• Free tempered glass and back cover
• Personal support for warranty claims
• Discounts on future purchases
• Better resale value
• Free servicing (in some cases)
• Additional accessories

I don’t mind paying extra for all these perks. Do you?

Anyway, according to the title, I have made the huge claim that you may lose 3% returns in the effort to save 1% with direct.

The title isn’t just a clickbait. However, advisors who offer regular plans can add up to 3% returns to your portfolio.

How? Let’s explore.

 

Can financial advisors add 3% to your returns?

Vanguard, one of the world’s largest investment firms, researched to quantify the value of financial advice.

According to Vanguard’s Advisor’s Alpha Strategy, a good financial advisor can boost your investment returns by up to 3% annually.

 

 

 

Let me explain each factor in detail: 

• Suitable asset allocation is the amount of money you should invest in stocks, bonds, gold, etc. Vanguard believes it to be crucial yet unique, making it impossible to calculate the added value.
• Cost-effective implementation involves identifying low-cost investment options and adding them to the portfolio. According to Vanguard, this adds 0.34% value to the returns.
• Rebalancing involves maintaining the original asset allocation to manage risk and stay on track with your goals. It contributes 0.26% to the returns.
• Behavioral coaching is the most crucial factor, bringing 1.5% returns. During market turbulence, investors often act out of greed or fear and make stupid decisions. A qualified financial advisor can act as a behavioral coach and help us make rational decisions.
• Asset location (not to be confused with asset allocation) is allocating your assets to maximize tax savings or helping save taxes with strategies like tax harvesting or instruments like ELSS funds. It can add up to 0.75% in returns.
• A spending strategy involves withdrawing money after retirement in a tax-efficient manner, with strategies like SWP yielding returns of up to 1.1%.

All these value-added services add up to 3% in overall returns. To put this in perspective, here is how 3% creates a difference.

 

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Vanguard Advisor’s alpha strategy Suitable asset allocation >0 bps* Cost-effective implementation 34 bps Rebalancing 26 bps Behavioural coaching 150 bps Asset location 0 to 75 bps Spending strategy (withdrawal order) 0 to 110 bps Total-return versus income investing >0 bps* Total potential value addition 3% in net returns *Significant value but too unique to calculate Source: Vanguard