Vanguard Touts Five Ways to Boost Returns

Following best practices can secure an extra 3% in net returns for the clients of advisers, according to Vanguard Advisor.

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.

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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.”

DOL Proposes Service Provider Fee Guides

The U.S. Department of Labor is seeking public comments about a proposed revision to fee disclosure rules that would simplify the way fee data is presented to some plan sponsors and participants.

In a conference call with reporters, Assistant Secretary of Labor for Employee Benefits Security Phyllis Borzi said the proposed rule change would update the 408(b)(2) fee disclosure regulations finalized by the DOL in 2012. As they are written today, the 408(b)(2) rules require companies that provide certain financial services to employer-sponsored 401(k) plans to furnish detailed information about those services and the compensation they receive, including data about payments from third parties and revenue-sharing agreements.

The proposed rule change would not impact the types of information service providers must supply to plan fiduciaries, Borzi explained, but rather the way the information is presented in some cases. Currently, fee disclosure rules allow service providers to use existing contracts and other operating documents to provide required disclosures to plan fiduciaries. During the call with reporters, Borzi said this has proved to be somewhat problematic in practice, especially for fiduciaries at small businesses and mid-sized employers, which often lack the internal expertise and funding resources to field and digest fee disclosures made through overly lengthy and complex contractual documents.

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To address this challenge, the proposed 408(b)(2) rule change introduces the idea of requiring service providers that issue fee documentation that is overly long or complex to develop a “guide” or “road map” that will help less experienced fiduciaries sift through large amounts of documentation to find relevant fee data.

Borzi said the DOL has not yet developed a specific trigger or maximum length for fee disclosure documents that would force a service provider to develop and circulate such a guide among its plan sponsor and fiduciary clients. She also said the DOL is still considering which format would be best for plan sponsors and participants—either a “guide” to exploring fee data across existing documents or a condensed “summary” that would draw together relevant fee data on a few pages. She is hoping the 90-day public comment period starting March 12 will shed some light on what sponsors and participants would prefer, and what is most tenable for the industry.

Borzi said she has already heard concerns that a summary would not be appropriate, as it could develop into a disincentive for sponsors to take the time to review fee documents first hand—one of the primary goals of the 408(b)(2) regulations finalized in 2012. A summary would also presumably be more expensive for service providers to develop. A guide, on the other hand, would do more to ensure sponsors were engaging effectively with fee documentation while protecting the documentation flexibility that is important to providers.

According to proposed rule-change language, if a guide is required, the covered service provider must direct the fiduciary to the place in the disclosure documents where a fiduciary can find the following:

  • The description of services to be provided;
  • The statement concerning services to be provided as a fiduciary and/or as a registered investment adviser (RIA);
  • The description of all direct and indirect compensation, any compensation that will be paid among related parties, compensation for termination of the contract or arrangement, as well as compensation for recordkeeping services; and
  • The required investment disclosures for fiduciary services and recordkeeping and brokerage services, including annual operating expenses and ongoing expenses, or if applicable, total annual operating expenses.

“We do think the 408(b)(2) rule has been a success so far,” Borzi said. “But we also think it can still be improved. This proposal today is designed to address the question of whether a more standardized format for the disclosures is important. We’ve seen more than just a few lengthy and complicated disclosures. Some include too much jargon. Some spread the data out over too many documents or sources.”

Borzi also announced during the call that the DOL intends to conduct approximately 10 focus group sessions with approximately 70 to 100 fiduciaries to small retirement plans—i.e. those with fewer than 100 participants—with the purpose of exploring current practices and the effects of the 408(b)(2) final regulation. During the process, the DOL will seek information about the need for a guide, summary, or similar tool to help responsible plan fiduciaries navigate and understand the required disclosures.

Borzi said the DOL estimates that significant benefits will result from the reduced time needed for fiduciaries to obtain compensation and related information needed to fulfill their fiduciary duties. While the DOL lacks complete data and empirical evidence to estimate the cost for covered service providers to create the guide, the department believes the costs to produce the guide will be less than the benefit derived from providing it to responsible plan fiduciaries.

The DOL's low-range estimate of the cost covered service providers would incur to create their guides is approximately $6.7 million annually and its high-range estimate is $22.2 million annually.

Comments cab be submitted electronically by email to e-ORI@dol.gov or by using the Federal eRulemaking portal at www.regulations.gov.

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