Financial wellness and planning
August 01, 2022
The advice industry is continuing to gravitate toward fee-based advice and away from commissions earned from selling investment products, executing transactions, or opening new accounts. That shift has greatly benefited clients and advisors by more closely aligning their interests. Unfortunately, it has also led many to equate the value an advisor adds with the annual fees deducted for the advisory relationship.
A recently updated Vanguard perspectives paper underscores that although some strategies advisors use could yield an annual benefit—such as reducing expected investment costs or taxes—the most significant opportunities present themselves intermittently, often during periods of either market duress or euphoria.
These opportunities can pique investors’ fear or greed, tempting them to abandon well-thought-out investment plans. In such circumstances, the advisor may have the opportunity to add tens of percentage points of value, rather than mere basis points, and may more than offset years of advisory fees. However, the difference in performance if clients stay invested according to plan, as opposed to abandoning it, does not show up on any portfolio statement.
We believe advisors can add value, or alpha, by providing relationship-oriented services such as cogent wealth management, including financial planning, discipline, and guidance, rather than by trying to outperform the market.
Using the framework for advisors outlined in our approach, which we call Vanguard Advisor’s Alpha®, can add up to, or even exceed, 3% in net returns for clients and help advisors differentiate their skills and practice. Like any approximation, the actual amount of value added may vary significantly depending on clients’ circumstances.
Here is a breakdown of where those net returns can be generated:
* Value is significant but unique to each investor and unquantifiable.
Notes: We believe implementing the Vanguard Advisor's Alpha framework can add up to, or even exceed, 3% net returns for your clients and also allow you to differentiate your skills and practice. The actual amount of value added may vary significantly depending on client circumstances and time horizon.
The paper explains the framework in depth, but in the sketch below, Carl Richards, CFP®, a popular author and media figure in investor education, encapsulates it as well as the essence of how we believe investors and advisors should view the entire investing process. Understand what’s important, understand what you can control, and focus your time and resources accordingly.
Notes: All investing is subject to risk, including the possible loss of the money you invest.