Evaluating investment advice is a difficult but necessary step on the path to your financial success. This fifth post examines services with quantifiable benefits.

Behavioural Coaching

It is common for investment advisors to believe that individual investors, left to their own devices, lack the discipline to design and execute an effective portfolio strategy. But is this borne out by evidence? The answer appears to be yes. Research supports the claim that investors tend to struggle with their investments, and especially, to engage in market-timing activities that are detrimental to their portfolio returns.

The method now commonly used to document this struggle involves comparing mutual fund investment returns (the returns achieved by the funds) with their corresponding investor returns (the returns achieved by the funds’ investors). Investment returns are measured with the time-weighted rate of return, while investor returns are measured by the dollar-weighted rate of return.1

Using this methodology, two different studies2,3 have concluded that investors tend to underperform the funds they invest in by 1.50% and 1.56%, respectively, because of poor market timing. Assuming that an advisor simply eliminates market timing, this would create 1.50% in behavioural coaching benefits for the client.

Rebalancing Your Portfolio

Over time, market fluctuations cause investment portfolios to drift away from their target asset allocation (for example 60% stocks / 40% bonds). Rebalancing is the process of restoring the different asset classes to their target weights.

In a recent study4 PWL compared the return and volatility (which measures risk) of a Canadian portfolio under a non-rebalancing scenario and ten naive rebalancing strategies, over the 1980–2014 period. All rebalanced portfolios produced higher returns and lower volatilities than did the non-rebalanced one. The same conclusion was reached when computing results for the 1980–1991, 1992–2003 and 2004֪–2014 sub-periods. Finally, the same ten rebalancing strategies were tested with a U.S., a U.K. and a Japanese portfolio. We found that 29 of the 30 naively rebalanced portfolios outperformed their non-rebalanced counterpart. We estimate that rebalancing adds 0.41% to risk-adjusted returns net of transaction and tax costs.

Selecting Investments

The underperformance of actively managed mutual funds is very well documented. A recent study from the Vanguard Group2 measured the average investor excess cost, by computing the difference between 1) the average investment cost (management fees, administrative fees and sales taxes) for mutual funds and ETFs available for sale in Canada; and 2) the lowest-cost quartile of funds. The authors concluded that just by selecting low-cost passive funds, an advisor can save clients up to 1.31%. In our view, this estimate is conservative, considering that other data from Standard and Poor’s document a much higher underperformance of active mutual funds.5


While most services performed by investment advisors are difficult to valuate, others can be estimated. Behavioral coaching, portfolio rebalancing and investment selection are essential services whose value can be quantified as substantial. In the sixth and final post of this series, we will summarize the key findings we’ve outlined.

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1 For more information about the time-weighted and money-weighted rates of return, we suggest: Bender, J., Bortolotti, D., Understanding Your Portfolio’s Rate of Return, PWL Capital, 2015.
2 Rich, R., Jaconetti, C., Kinniry, F., Bennyhoff, D., Zilbering, Y., Putting a Value on Your Value: Quantifying Vanguard Advisor’s Alpha in Canada, The Vanguard Group, 2015.
3 Friesen, G., Sapp, T., Mutual Fund Flows and Investor Returns: An Empirical Examination of Fund Investor Timing Ability, CBA Faculty Publications, 2007.
4 Kerzérho, R., A Rebalancing Act: Estimating the Value Added Through Portfolio Rebalancing, PWL Capital, 2016.
5 The SPIVA Canada Scorecard documents an average underperformance of active mutual funds versus their benchmark index of 2.46% for the 2010–2014 period, and 2.50% for the 2005–2009 period.