Vanguard Measures Emotional Value of Financial Advice

It has long been thought that emotions play a role in investors' perception of the value of financial advice. A research paper released recently by Vanguard appears to validate that hypothesis.

Researchers estimated that emotional elements account for about 40% of investors' perceived value of financial advice, while the balance of the perceived value of advice is attributable to functional aspects of the advisory relationship.

The researchers examined the role of 24 key value attributes on advised investors' perceived value of advice. Each one was characterized as either emotional (e.g., "trusting that the advisor will put my needs first" and "having a personal connection") or functional (e.g., "balancing saving and investing" and "maximizing investment returns").

They found a distinct difference in how the attributes were perceived by traditionally advised and robo-advised investors.

The Value of a Human Advisor

Among traditionally advised investors, the components of a financial advisor's value are organized around the relationship with a trusted advisor and service.

A relationship with a trusted advisor comprises both designated emotional attributes — trust, personal connection and proactive outreach — and functional attributes — constant plan monitoring, expert perspective and visibility of portfolio changes.

Service, on the other hand, represents functional attributes, such as developing a customized financial plan, maximizing investment returns and third-party financial mediation.

"Advisors need to understand what their clients value — and conversely, what they don't — so they can prioritize the most meaningful aspects of their relationships, Thomas Rampulla, managing director of Vanguard's financial advisor services, said in a statement.

"In good markets and in tough markets like now, this enables them to foster trust and provide services that resonate. The business benefit of this study for advisors is tangible, as trusted advisors receive increased client loyalty, incremental growth in managed assets, and lower levels of client attrition."

The Value of Robo-Advice

When it comes to robo-advised investors, three themes comprise the perceived value of all-digital advice services emerged: transparency, empowerment and interaction with the service.

Key value attributes include trust, constant plan monitoring, time delegation, knowledge of fees, having a customized financial plan and the need for control.

"Our research demonstrates that the attributes that drive the emotional value of advice are dependent upon the type of advisory service an investor uses," said Anna Madamba, senior researcher in Vanguard's investment strategy group and co-author of the paper, said in the statement.

"While we observed that most of the perceived value among traditionally advised investors lies within the relationship with their advisor, the emotional elements among robo-advised investors are focused on providing a sense of accomplishment and control."

The study also found that most advised investors were not knowledgeable on advice costs. Most respondents knew how they were paying for advice, but less than half knew how much they paid.

"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," Cynthia Pagliaro, senior researcher in Vanguard Investment Strategy Group and co-author of the paper, said in the statement.

"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."

The Vanguard paper said advisors should go beyond investment expertise and portfolio outcomes and cultivate a deeper relationship with their clients, focusing on their financial well-being. Identifying and addressing their needs, both expressed and unexpressed, can develop rapport and reinforce the advisor's commitment to growing that relationship.

Emotions are also important even absent a human interface. The paper said a robo-advice service should first establish its trustworthiness. At the same time, it can meet users' emotional needs by providing greater transparency in process, fees and account access. And making the advice interface easy to use will foster a sense of accomplishment.

— Check out Vanguard Expands Digital Advisor Pilot Program on ThinkAdvisor.