Dalbar Inc. is widely considered a gold standard in financial services research. Of particular import is their annual Qualitative Analysis of Investor Behavior (QAIB) which monitors the gap between leading indicators of investment performance and what mutual fund investors actually earn. For more than 20 years this Dalbar report has shown that fund investors earn about half of what the S&P 500 Index returns, and the average fixed income (bond fund) investor doesn’t even keep pace with inflation. How does this happen? The annual study cites irrational behavior as the primary cause for the chronic return shortfall.
A long list of classic psychological factors like loss aversion, narrow framing, anchoring, mental accounting, herding, and media response cause investors to skip or short-cut prudent practices. While I could write an entire series of articles on these financial foibles, Dalbar suggests such an effort would be fruitless.
According to the 2014 QAIB, the gap between investment and investor returns is actually worsening. This deterioration of returns in the face of unprecedented access to financial education prompted Dalbar to announce, “It is now past the time for the investment community and its regulators to understand that the principle of educating uninterested investors about the complexities of investing is unproductive”. 1
While common knowledge among financial advisers, it is officially clear that popular sources of financial information and education are ineffective. The financial media we so readily devour is a waste of time for the vast majority of investors. The same might be said of information and education fed to retirement plan participants by their plan sponsors.
So what does work? What is proven to reduce the chronic return shortfall? What keeps disinterested investors from undermining their own investment needs? The answer is surprisingly obvious.
Vanguard published a best practices report showing how the continuous support of an adviser can dramatically reduce the performance gap. By recommending “cost effective investments, rebalancing portfolios, providing behavioral coaching, asset allocation, and a prudent spending strategy” financial advisers help investors boost annual returns by an estimated 3%." 2 The Wall Street Journal states that quality investment advice boosts the value of an investment portfolio 79% over a lifetime. 3 Aeon-Hewitt published a similar report indicating that retirement plan participants who receive continuous help earn an average of 3.32% greater annual net returns than non-help participants . 4
The takeaway here is extremely simple…. Those who are not using a financial adviser will have to work a lot longer and/or retire with a lot less.
2. The buck stops here: Putting a value on your value: Vanguard money market funds Quantifying Vanguard Advisor’s Alpha, Vanguard Research May 2014
3. Advice seekers retire with 79% more money, Wall Street Journal, Market Watch May 22, 2014
4. Help in Defined Contribution Plans: 2006 through 2012, Aeon-Hewitt, May 2014