Advised investors underperformed self-directed ones in 2013, SigFig data show

Clients of advisers saw some stock gains, but bonds held them back, website for investors finds

By Trevor Hunnicutt

Jan 22, 2014 @ 12:01 am (Updated 5:20 pm) EST

adviser, outperform, bonds, stocks

Investors opening their year-end account statements are likely to be reassured that the financial crisis is in the rearview mirror.

But clients of financial advisers may not be as pleased to learn that their portfolios underperformed those of self-directed investors.

Investors who paid fees for portfolio management saw portfolio returns of 14.1% last year, according to SigFig, a website that helps investors track and manage their money.

But investors who didn't pay those fees captured a 17.1% return over the year, said Samantha Murillo, a spokeswoman for the firm, which tracks about 1 million investors' portfolios.

Investment portfolios were lifted by strong domestic stock market appreciation last year, with the S&P 500 rising 29.6% during the year. But bond prices fell dramatically as the Federal Reserve considered reducing the billions in monthly asset purchases it uses to depress interest rates and stimulate economic growth.

The relative underperformance of advised portfolios was likely due to asset allocation strategies that exposed investors to suffering bonds, said Lee DeLorenzo, an adviser and president of United Asset Strategies Inc.

“Those numbers don't surprise me,” she said. “I don't think the exposure to bonds was a mistake. I think it caught most of us by surprise.”

Grant Rawdin, president and CEO of Wescott Financial Advisory Group, said the investors in 2013 might have been rewarded for not being well-diversified.

“As advisers, we try to pull our clients away from one area of the market,” he said. “We know the real value is in all of the planning we do for the client, the security we give our client.”

Another value of advisers is in managing their clients' behavior, Ms. DeLorenzo said.

“Financial advisers, just because of the market psychology, can keep people calm from making those traditional mistakes: buy high, sell low, stick with a loser and wait for it to come back,” she said.

“That is worth the 1%,” Ms. DeLorenzo said, referring to the price that many advisers charge for their services each year.

The cost of financial advice for the subset of some 35,000 investors who paid management fees amounted to an average expense ratio of 70 basis points last year, excluding asset management fees, according to SigFig.

Average expense ratios ranged from 90 basis points for clients with less than $250,000 in holdings to 40 basis points for those with more than $2 million invested. (One basis point is equal to 0.01%.)

The data set may not mirror the overall performance of investors.

For instance, SigFig users appear to be more aggressive than the average investor, putting more than six in 10 of their investible dollars in stocks. Advised clients had slightly less exposure to stocks.

But American investors overall keep 48% of their investible assets in cash, 18% in equities and 7% in bonds, according to a survey last year by asset manager BlackRock Inc.

The SigFig data came from examination of the portfolios of investors who track their portfolio performance on the SigFig site. The website is run by registered investment adviser SigFig Wealth Management, that launched its own fee-based portfolio management service last month.

The firm's founder and chief executive, Michael Sha, has said that conflicts of interest and hidden fees are common in the advisory industry.

Some advisers say that low-cost, online financial advice services provide only basic services and that their business plans aren't feasible.