Trust and personal connections, as well as other emotional factors, account for a large portion of the value that clients place on financial advice, according to a new study by Vanguard.
In a study that focused on the role of emotions in the relationships between clients and advisors, Vanguard found that such factors accounted for about 41% of investors' perceived value they get from professional advice. Traditional factors such as portfolio management and financial planning, meanwhile, contribute to 59% of the perceived value, according to the study.
"Our research has quantified the role of emotions in the advisory relationship," the report said. "We believe that, going forward, assessments of the value of financial advice should include an evaluation of the emotional value it provides investors."
The study concluded that there are three main components to the value that investors place on their relationship with advisors: portfolio value, financial value and emotional value.
The portfolio value has to do with optimal portfolio construction and client risk-taking and includes factors such as a portfolio's risk versus its return characteristics, tax efficiency, fees and rebalancing and trading activity, the study said. Financial value encompasses saving and spending behavior, debt levels, retirement planning, insurance and risk management and estate planning.
Emotional value, meanwhile, is tied to a client's peace of mind, the report said. This includes a client's trust in the advisor and the markets, his or her success and sense of accomplishment, the level of behavioral coaching provided by the advisor and the client's confidence, the report said.
The report found that even for robo-advisor clients, 38% of the value they place on the services they received from institutions is tied to emotional factors, but with more of a focus on a client's need for transparency and the feeling of empowerment when using the services.
"Robo-advised investors look to an advice service as a means to gain control over their finances," the report said. "It is important for them to feel that they are taking charge of their finances, are aware of how much they pay in fees, and are heading toward financial freedom."
The study noted that fees were not as large a factor in clients’ thinking as some might expect because the majority of advised investors are not knowledgeable about what they were paying for advice.
"This lack of investor comprehension in regards to how much they pay for advice highlights an opportunity for the industry to disclose fees in a more clear and transparent manner," said Cynthia Pagliaro, a senior researcher at the Vanguard Investment Strategy Group and co-author of the paper. "Cost transparency would greatly benefit advisors, as it would enable them to better articulate the value of their service to clients in relation to the fees they charge."