What are the Average Financial Advisor’s Returns?

So you might be considering using the services of a Financial Planner, and you want to know if it's worth it. After all, if you're going to be paying money to somebody to manage your investments for you, you want to make sure that you're actually going to get some benefit from that. If you can end up paying fees that equate to more than any extra returns you get, then you may as well just carry on doing it yourself! 

But before we talk about what the Financial Advisors average returns actually are, it's important to get an understanding of where your return actually comes from. In today's article, I'm going to be explaining to you the three key elements to investment returns, and how Financial Advisors can impact these.

One of the key things to understand is that Financial Advisors don't provide the returns. A Financial Advisor tells you what they recommend you invest in, and provides advice on the best way to do that. They also provide advice around things like minimising tax, gifting money in an efficient way and managing your ongoing cash flow. All of these things are massively valuable, but they don't equate to average Financial Advisor returns. A Financial Advisor could recommend investments that you could invest in yourself. And in fact, many of the investments that they do recommend will be regular retail ETFs or investment funds that you could go and purchase for yourself on a do-it-yourself investment platform.

Long term investment returns in general can range very widely depending on how you invest. As an example, the average return for a portfolio invested 100% into the S&P 500 Index in the United States from 1957 to the end of 2021 is just over 10% per year.

So if you're thinking about the question of what are average Financial Advisor returns, really what you need to understand is that Financial Advisors just help you access investments and plan the best way to hold and transfer your money. When it comes to the actual figures, there's a number of different ways that investment returns are generated.

Does More Risk Equal More Return?

When it comes to how much of a return you can expect from your investments, the first thing, and really the most important thing, that will decide this is the level of risk that you're prepared to take. And when I say level of risk what I really mean is the amount you're prepared to invest in the stock market. 

The reason for this is the stock market is what's going to get you the best long term returns, but it's also the area that's going to fluctuate the most in value. So if you're prepared to put up with a roller coaster ride, you're probably going to end up with a bigger chunk of cash down the line! When it comes to investing in the stock market, it's not an all or nothing proposition. You don't have to go all in with 100% into the stock market, full on risk and feel every up and down of the market, in order to invest. By the same token if you don't want to take a high amount of risk, you also don't have to just put everything in cash and take basically no return on your investment. 

You can put any percentage into the stock market that you're comfortable with. A cautious type of portfolio might have, say, 30% in the stock market with the remaining 70% made up of cash and other defensive investments like fixed interest, bonds and gilts. A balanced approach, somewhere in the middle of the range might have 50 or 60% in the stock market and a more aggressive approach could have 80% or more. The key point is the higher this percentage, the better your likely long term returns, but also the more that is going to fluctuate in the short term. When it comes to your average long term returns, basically the more that's invested in the stock market, the better those average long term returns are going to be.

One of the things that a Financial Advisor will do is make sure you get this mix right. They'll talk to you about how you feel about risk, what emotions you go through when your investments go down in value, and also talk about your long term objectives. What's the money actually for? The more information they get around this, around your thoughts and feelings and goals and objectives, the better advice they can give you about what level of risk is right for you.

So the Financial Advisor isn't necessarily going to get you a better return by getting these figures right, but they are going to get you a return that is more aligned with how you feel about your money.

Do Fees Impact Your Average Investment Returns?

The next aspect to your financial investments that are going to make a difference to your long term returns are the fees that you're paying. Now obviously you are going to be paying fees to a Financial Advisor, so it's important to get a good understanding of how much they are charging you, but also how much the underlying investment managers are charging you as well. 

Overall you want to try and reduce your fees as much as possible, as long as the investments are right for you. Again, a Financial Advisor can add a lot of value here they can help you pick the right investments for you. They can help manage them on your behalf. So the fact that you're paying fees to a Financial Advisor isn't necessarily going to put you in a worse financial position in the end. If you find a good Financial Advisor, they should be able to provide you value for money for your fees. That means you're better off financially even after you've paid them. Realistically, if this isn’t the case then you should probably rethink why you’ve employed them.

Keep in mind though, a Financial Planner doesn’t just provide advice on investments. They also provide advice on estate planning, Inheritance Tax planning, cashflow management, gifting advice and more. All of these tax benefits can add up to a lot more than their fees over the long term.

How to Manage Investment Behaviour

The third big pillar of what impacts your long term average returns is your behaviour. What I mean by behaviour is whether you make bad financial decisions when the market crashes. Do you sell at a time where you've already lost a significant amount of money? When markets are going to all time highs, they're in bubble territory, are you buying up the euphoria? Are you buying everything at incredibly high prices? 

A financial advisor adds huge amounts of value when it comes to behaviour. They can talk you through market crashes. They can temper your expectations when prices are high. They can basically look at long term markets with dispassionate and non-emotional eyes and make sure that you're making the right decisions for yourself without getting carried away by what's going on in the markets. 

After all, investing is a long term proposition and you need to be able to keep a long term perspective. An unbiased third party like a Financial Advisor can massively help with this area. In fact, Vanguard have even released a study on this in a White Paper which quantified the value that a Financial Planner adds. They calculated that managing behaviour equates to an average increase in returns of 1.5% per annum! So all other things being equal, having a Financial Advisor that can hold your hand and work through those market fluctuations can potentially add up to 1.50% in additional return over a long period of time.

Is a Financial Advisor Worth it?

We started out by looking to answer the question of what are average Financial Advisor returns. Hopefully after reading this you’ll understand that there is no such thing as an average Financial Advisor return, because they can invest in an almost unlimited number of ways depending on what is right for each specific client.

So whilst there’s no set average return number to look at, you can see that there are a number of ways a Financial Planner adds value to your finances. Over a long period of time, working with a Financial Advisor should increase your overall financial returns, particularly once areas such as tax are taken into account.