Vanguard Introduces New Framework For Assessing The Value Of Financial Advice

Research underscores advice’s value on three key dimensions: portfolio, financial, and emotional 

VALLEY FORGE, PA (September 16, 2019)—In a new paper released today, Vanguard researchers introduce a three-part framework for measuring the value of financial advice to investors. Using data derived from Vanguard Personal Advisor Services clients, Assessing the Value of Advice demonstrates that the value of advice encompasses three broad dimensions: portfolio, financial, and emotional.

“Vanguard has long focused on advice and the value it delivers to investors,” said Steve Utkus, global head of investor research for Vanguard Investment Strategy Group and co-author of the paper. “The value of advice has traditionally been focused on portfolio outcomes, but as our new framework illustrates, a broader definition including financial and emotional outcomes provides a more comprehensive assessment of advice’s true value.”

In the paper, Vanguard researchers highlighted the following findings:

• Portfolio outcomes: The implementation of financial advice materially altered the equity risk taking for two-thirds of investors, changed international allocations for 90%, and reduced cash holdings—and their associated opportunity cost—for 28%. Additionally, single-stock risk was effectively eliminated for the 10% of investors who had held significant positions in individual stocks. Portfolios based on index funds increased for eight in ten, leading to considerably reduced costs.

• Financial outcomes: The researchers analyzed goal success rates among Personal Advisor Services clients and found that 80% with a defined retirement goal had at least an 80% probability of achieving their objective, while 20% had a mismatch between their projected level of retirement resources and desired standard of living.

• Emotional outcomes: To quantify emotional outcomes, the researchers developed an estimate for the fraction of value in an advisory relationship that arises from emotional elements, such as trust in, or a personal connection to, an advisor. Vanguard found that emotional outcomes account for 45% of the total value perceived by the investor, while 55% of the value is attributed to functional aspects of the relationship, such as portfolio management and financial planning.

Research based on real-world investor metrics

While there have been many industry and academic studies seeking to develop better ways to measure the value of advice, Assessing the Value of Advice presents new insights by leveraging metrics based on administrative and survey data from Personal Advisor Services clients.

“We employed both quantitative and qualitative analysis, studying the asset allocations of nearly 45,000 clients, the goal success rates of nearly 105,000 clients, and surveys completed by more than 500 clients to gauge their perceptions of value in their advisory relationships,” said Cynthia Pagliaro, senior research analyst with Vanguard Center for Investor Research and co-author of the paper.

Introduced in 2015, Personal Advisor Services is Vanguard’s hybrid advice service, combining sophisticated technology and a proprietary capital markets model with the unique coaching capabilities of a human advisor. The service, which manages $140 billion, is suited for individuals in any stage of the investment life cycle, but is particularly valuable for pre-retirees and retirees facing increasingly complex financial situations. Vanguard advisors can help clients navigate these complexities via features that include Social Security optimization, saving sufficiency analysis, dynamic spending strategies, estate and tax planning, charitable giving guidance, and trust services.

Vanguard’s advice thought leadership

This first paper of a planned series presents the new framework; three subsequent papers slated for publication in the coming months will dive deeper into each of the three dimensions of the framework.

Assessing the Value of Advice represents the continuation of Vanguard’s advice thought leadership. In 2001, the firm developed the Advisor’s Alpha concept, which outlines how advisors can add more consistent value, or alpha, by providing relationship-oriented services (including cogent wealth management, behavioral coaching, and guidance) rather than outperforming a policy portfolio, which has historically been the primary value proposition for many advisors. Vanguard researchers augmented this work by quantifying the value in a subsequent paper published in 2014, Putting a Value on Your Value: Quantifying Vanguard Advisor Alpha.

Vanguard: An advice advocate

Vanguard believes financial advice can help investors achieve better outcomes and has served as a vocal advocate for the value of advice and the important role that advisors play in fulfilling investors’ needs for financial planning and wealth management. Vanguard has offered direct advice services to individual investors since 1996 and a managed account program has been available for 401(k) plan sponsors and participants since 2004.

Vanguard is also continuing to expand its partnerships with an increasing number of independent financial advisors and planners to deliver high-value advice to their clients. The firm provides tools, model portfolios, thought leadership, and other services to support advisors, help them grow their businesses, and better meet clients’ needs.

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About Vanguard

Vanguard is one of the world’s largest investment management companies. As of July 31, 2019, Vanguard managed $5.7 trillion in global assets. The firm, headquartered in Valley Forge, Pennsylvania, offers 418 funds to its more than 20 million investors worldwide. For more information, visit vanguard.com.

All investing is subject to risk, including the possible loss of the money you invest.

Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.