Often called interventions, advice recommendations include measures intended to increase wealth as well as more subjective goals, such as enhancing life satisfaction. To benchmark specific advice recommendations, the paper’s authors say, it’s crucial that an advisor understand not only the investor’s personal goals but also their specific circumstances.
Personal goals may include retiring early, making bequests, or simply maintaining a stable lifestyle over time. An investor’s circumstances include their tax situation, health status, and household financial considerations. Other factors that go into modeling specific recommendations include market and inflation scenarios as well as advice fees.
“New models allow us to quantify the value of specific recommendations against an investor’s current plan,” Weber said. “We can then compare the potential range of outcomes for the interventions in aggregate with a similar distribution of outcomes for the baseline or existing plan.”
Results are based on how much additional wealth or extra annual return investors would need to achieve under their baseline scenario to produce a range of possible future outcomes equal to the advised scenario, Weber added.
“Our research shows that it is not unusual for the combined effect of advice interventions to be valued at hundreds of basis points annually and hundreds of thousands of dollars over time,” he said.1