WEALTHTECH INSIDER: Finding the Dollars-and-Cents Impact of Modern Behavioral Coaching


By Dr. Daniel Crosby

The past year has shown investors the value of working with a seasoned financial professional to get through difficult times. It’s something we understand intuitively,  but how do you quantify the benefits of planning, guidance, and behavioral finance?

The tendency to seek complexity and ignore simplicity has been alive and well for years in investment circles. For far too long, financial advisors have led with proprietary product pitches or the assertion that they can outperform the market through superior investment acumen. This appeal to complexity has rung true to an investing public overwhelmed by the vagaries of financial markets, but is beginning to crumble in the face of popular research that highlights the difficulties in generating investment “alpha.”

Vanguard’s “Advisor’s Alpha” study quantifies the value added (in basis points, or bps) by many of the common activities performed by an advisor, and the results may surprise you. They include:

• Rebalancing: 35 bps

• Asset allocation: 0 to 75 bps

• Behavioral coaching: 150 bps

Hand-holding provides more added value than any of the activities more directly associated with the management of money. Vanguard’s study concludes that working with an advisor can add about 3% per year of average added value. But fully half of that value comes from behavioral coaching, or preventing clients from making foolish decisions during times of fear or greed!

Morningstar’s “Alpha, Beta… and now Gamma” study shows the true value added by an advisor and the things investors should seek out when choosing a professional. The study lists the sources of added values as follows:

• Asset allocation

• Withdrawal strategy

• Tax efficiency

• Product allocation

• Goals-based advice

While some sources of gamma can easily be self-taught (e.g., asset allocation) others remain uniquely powerful in the hands of an outside advisor. It is not difficult to find instructions on investing in a broadly diversified mix of asset classes. But if knowledge were sufficient to induce appropriate behavior, America would not be staring down the barrel of a looming retirement crisis!

In addition to the financial rewards of working with an advisor, investors also enjoy added confidence and security that are no less valuable. The Canadian “Value of Advice Report” found those paying for financial advice reported a greater sense of confidence, more certainty about their ability to retire comfortably, and having higher levels of funds for an emergency. A separate study performed by the Financial Planning Standards Council found 61% of those paying for financial advice answered affirmatively to “I have peace of mind” compared to only 36% of their “no plan” peers. The majority (54%) of those with a plan felt prepared in the event of an emergency versus only 22% of those without a plan. Finally, 51% of respondents with a plan felt prepared for retirement against a frightening 18% of those not receiving advice.

Receiving good financial advice pays a dividend that builds both wealth and confidence. The research is unequivocal that a competent financial guide can both help you achieve the returns necessary to arrive at your financial destination while simultaneously improving the quality of your journey.

Dr. Daniel Crosby is Chief Behavioral Officer at Orion Advisor Solutions,  a psychologist, and behavioral finance expert who helps organizations understand the intersection of mind and markets. Dr. Crosby recently co-authored a New York Times Best-Selling book titled, “Personal Benchmark: Integrating Behavioral Finance and Investment Management“.