The Advisor Alpha: How Much Are You Worth To Clients?

June 28, 2016

by Frank Serebin

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

Have you ever had a prospect or client ask, “How can you be worth your fees?”

Or maybe they were just thinking, “How can this Registered Investment Advisor or financial planner add value to my portfolio?”

Or simply: “Are you worth it?”

A 2014 study by Vanguard, The Added Value of Financial Advisors, looked at data over a 15-year period. It sought to put a value on your value. (See infographic.)

The Advisor Alpha: How Much Are You Worth To Clients?

The Advisor Alpha: How Much Are You Worth To Clients? [INFOGRAPHIC]

The Vanguard answer: Advisors can potentially add 3.00% each year to client returns.

That’s after fees, expenses and taxes.

So how can you add 3.00% more each year than the average advisor?

The three factors in your control, according to Vanguard, are behavioral coaching, asset allocation and wealth management.

  • Behavioral Coaching: 1.50% (or more)

Managing client behavior in challenging markets and adhering to the long-term financial plan you’ve set out for them are a critical part of your value. “Periods of significant underperformance can undermine your client’s trust in you,” said the report.

As the market gyrates, trusted Uncle Harry may have told your client that he lost a bunch of money when the stock market last tanked. Or someone on Twitter or the TV (your client can’t remember which) said that mutual funds were too expensive, a fool’s errand or something else (he’s not sure).

How to overcome these and similar objections? Said behavioral finance experts Kent Baker and Victor Ricciardi, “When faced with periods of market turbulence, they need to advise their clients to stay true to their plans and to focus on long-term goals, not market timing. The value proposition of such advisors centers on client outcomes, not uncertain markets. In short, advisers need to remain disciplined even though their clients are not.” (Source: Journal of Financial Planning, How to Manage Client Expectations in Turbulent Times)

  • Portfolio Construction: 1.25%

Asset allocation is the second area in which you can add value. Which stocks, bonds, mutual funds, ETFs, hedge funds, CTAs, sectors, managers, risk profiles and so on, do you select as suitable for your clients?

  • Wealth Management: Up to 1.05%

How you help your clients rebalance their portfolios – and how frequently and systematically – is the third most critical factor in achieving alpha.

Why rebalance? According to Vanguard, “Over time, asset classes produce different returns, so the portfolio’s asset allocation changes. Therefore, to recapture the portfolio’s original risk-and-return characteristics, the portfolio should be rebalanced.”

Looking to add alpha to your client’s portfolio? It’s up to you.

Frank Serebrin is president and founder of InCapital Marketing. He oversees the creation of content-driven inbound marketing for Registered Investment Advisors, financial advisors and investment managers.