Over the past several years, various studies have attempted to determine whether financial advisors add value. Although I haven’t done an extensive literature review, most of the papers I’ve seen are not flattering to advisors. But to a certain extent, academics are attempting to measure the immeasurable.

> Funds vs Investor Performance. One paper on the U.S. fund industry found, for example, that “broker-sold funds deliver lower risk-adjusted returns, even before subtracting distribution costs” relative to direct-sold funds.

There are two problems here.

First, this study seemingly ignored how the portfolios of broker-advised inves-tors performed vs those of do-it-yourself investors. In other words, this paper compared product performance, not inves-tor performance. Second, U.S. mutual funds are frequently offered in multiple share classes — lower fee classes for DIY investors and higher fee classes for advised investors. In these cases, the DIY share class’s lower fee will always cause it to outperform the otherwise identical (but more expensive) advisor share class.

> Selection Bias. Two other papers have calculated investor returns, but contain a bias that is impossible to eliminate. A 2008 study examined the gap between investor return and the published returns of load, actively managed U.S. equities funds and U.S. index funds. It found that this performance gap was worse for advised investors in actively managed funds than for index-fund investors.

Another paper looked at data from a brokerage firm in Germany and found that advised accounts didn’t fare as well vs non-advised accounts. This paper studied advisors who were paid primarily by trading commissions and who seemingly picked stocks and bonds directly for their clients — a different structure than that applying to most Canadian advisors.

These papers are not kind to advisors. But they left out a key piece of information — namely, what investors would have done had they never engaged the advisor in the first place. In other words, a selection bias exists to a certain extent because maybe DIY investors don’t need help. And maybe those advised inves-tors would perform much worse without an advisor. But these are what-if scenarios that cannot be measured. I have seen this first-hand in my work directly with clients and indirectly via consulting work with advisors.

In academic research, the concept of “value-added” is restricted to investments. In reality, many advisors are more than investment advisors.

> Non-Investment Impact. Although advisors are often compensated from the investment portfolio, many advisors help clients in one or two areas beyond investments. To the extent that advisors do retirement planning, effective tax and estate planning or help clients with other aspects of their financial lives, these research papers do not have a full view of the cost/benefit equation.

I’m not criticizing but am highlighting the limitations that may preclude firm conclusions about advisors’ value-added, which I contend is very much a case-by-case assessment. That doesn’t mean the issue shouldn’t be studied; it should. We simply should be aware of the limitations of such studies. Advisors need not fear such studies, though. Rather, use the conclusions to help you avoid the factors that can neutralize or negate your value-added, such as poor portfolio construction, poor timing and excessive fees. IE

Dan Hallett, CFA, CFP, is director, asset management, for Oakville, Ont.-based HighView Financial Group.