According to a research study published today by Vanguard research, financial advisors can potentially increase client net returns by around 3% using Vanguard Advisor’s AlphaTM, a wealth management framework based on structured portfolio construction, behavioral coaching, asset location and other relationship-oriented services. The study compared the individual best practices within the Advisor’s Alpha framework and relative to others who are not employing such practices and calculated the difference in investment return performance over time.
Vanguard Research statement
Vanguard also released a statement regarding the study this morning: “We believe advisors have the opportunity to meaningfully improve investor outcomes, and we are pleased to be able to provide advisors a mechanism to demonstrate their value to clients in a quantifiable manner,” said Francis Kinniry Jr., a study author and a principal in Vanguard’s Investment Strategy Group. “As the industry continues to evolve from a commission-based to a fee-based model, advisors who successfully explain their value have more time to serve clients, leading to increased client satisfaction and retention.”
Five wealth management principles
Being an effective behavioral coach — Assisting clients in keeping a long-term perspective and a steady hand is clearly a very important aspect of providing financial advice. According to the study, effective behavioral coaching is worth up to an additional 1.50% of net return.
Applying an asset location strategy — A thoughtful allocation of assets between taxable and nontaxable accounts also adds value to client returns. Clients can expect a potential value add up to 0.75% from a carefully considered and frequently reviewed asset location strategy.
Employing cost-effective investments — Utilizing cost-effective investments is emphasized in business school and all financial advisors should be certain clietns are not paying too much in fees on their investments. You can’t ignore the fact that gross return less costs equals net return. Sticking to cost-effective investments can add up to 0.45% to net returns.
Maintaining the proper allocation through rebalancing — Portfolios require rebalancing over time as the returns of various investments change the target allocation. Financial advisors should ensure a portfolio’s risk/return characteristics stay consistent with a client’s preferences, and doing so can add up to 0.35% to net returns.
Implementing a spending strategy — Financial advisors can help clients make optimal decisions about how to spend from their portfolios when the need arises. This advice can increase portfolio net return by as much as 0.70%.
It should be noted that the percentages mentioned above should not be thought of as “annual”, as they actually represent an average over a number of years, with the principles adding more value in some years than others.
The report also noted a focus on asset allocation and total return versus income investing can also add to return, but these vary by investor and are thus not easily quantified.