Vanguard says it can help advisers implement these best practices through its wealth management platform, Vanguard Advisor’s Alpha. The platform provides assistance on portfolio construction, behavioral coaching, asset location, and other relationship-oriented service to help advisers increase net returns for their clients.
The platform is the subject of a new research paper, “Putting a Value on Your Value: Quantifying Vanguard Advisor Alpha,” which examines the individual best practices within the Advisor’s Alpha framework and quantifies the value advisers can add relative to others who are not employing such practices.
Calculating how much an adviser can add in net returns is based mainly on their approach to five wealth management principles. (The exact amount may vary depending on client circumstances and implementation.)
Vanguard recommends that an adviser add value in the following ways:
- Be an effective behavioral coach. Helping clients maintain a long-term perspective and a disciplined approach is arguably one of the most important elements of financial advice. (Potential value add: up to 1.50%.)
- Apply an asset-location strategy. Allocating assets between taxable and tax-advantaged accounts is one tool an adviser can employ that can add value each year. (Potential value add: from 0% to 0.75%.)
- Employ cost-effective investments. This critical component of every adviser’s tool kit is based on simple math: Gross return less costs equals net return. (Potential value add: up to 0.45%.)
- Maintain the proper allocation through rebalancing. Over time, as its investments produce various returns, a portfolio will likely drift from its target allocation. An adviser can add value by ensuring that the portfolio’s risk/return characteristics stay consistent with a client’s preferences. (Potential value add: up to 0.35%.)
- Implement a spending strategy. As the retiree population grows, an adviser can help clients make important decisions about how to spend from their portfolios. (Potential value add: up to 0.70%.)
Improving Investor Outcomes
How an adviser approaches two additional principles, asset allocation and total return versus income investing, can also add value, but are too specific to each investor to quantify.
The Vanguard Advisor’s Alpha framework incorporates all of these principles, making it possible for advisers to add up to about 3% in net returns for their clients. This figure should not be viewed as an annual add, however. Vanguard’s research emphasizes that it is more likely to be intermittent, as some of the most significant opportunities to add value occur during periods of market duress or euphoria that tempt clients to abandon their well-thought-out investment plans.
In such circumstances, the adviser may have the opportunity to add tens of percentage points, rather than merely basis points. Although this wealth creation will not show up on any client statement, it is real and represents the difference in clients’ performance if they stay invested according to their plan as opposed to abandoning it.
“We believe advisers have the opportunity to meaningfully improve investor outcomes, and we are pleased to be able to provide advisers a mechanism to demonstrate their value to clients in a quantifiable manner,” said Francis Kinniry Jr., one of the study’s authors and a principal in Vanguard’s Investment Strategy Group. “As the industry continues to evolve from a commission-based to a fee-based model, advisers who successfully explain their value have more time to serve clients, leading to increased client satisfaction and retention.”