As an advisor, you may find that defining your value proposition to clients and prospective clients can be challenging. And, on the flip side, clients might have difficulty understanding that value you provide extends beyond the absolute performance of their portfolio.
To address this conundrum, Vanguard researchers developed a mechanism to help advisors demonstrate their value to clients in a quantifiable manner. We found that there is a potential of about 3% in additional net returns can be produced by providing cogent wealth management, financial planning, and guidance.
When Vanguard developed the
Recognizing that wealth management is more complex -- and that greater value could be generated by refocusing financial planning on long-term outcomes rather than year-to-year results -- we steered the conversation of financial advice to enduring principles.
Using a client-relationship-focused model, Advisor's Alpha equips the industry with the tools to evolve the financial planning practice. As a result, we believe it helps to redefine the value proposition of advisors.
Many advisors already practice these principles. Still, we felt that more could be done to demonstrate the value of this guidance so both clients and advisors could fully realize the benefit of embracing the model.
CONCRETE VALUE
Naturally, the next step was to put a number on the value of that advice -- a value that, while real, is much easier to describe than define. After all, what was the value of keeping a client on course during the financial crisis? Such value is easier pegged by words than numbers.
In our quest, we did extensive research to quantify how much could potentially be added to clients' net returns by implementing the framework, culminating in our recently published report, Putting a value on Your Value: Quantifying Vanguard Advisor's Alpha.
The bottom line: We found that advisors can add "about 3%" in net returns when comparing the projected results of a portfolio that is managed using well-known and accepted best practices for wealth management with those of portfolios that are not. This 3% should not be viewed as an annual value-add, but is likely to be intermittent: Some of the most significant opportunities to add value occur during periods of market duress or euphoria, when clients are tempted to abandon their well-thought-out investment plan.
Although the exact amount may vary depending on client circumstances and implementation, an advisor can add value by:
- Being 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 1.5%.)
- Applying an
asset location strategy . The allocation of assets between taxable and tax-advantaged accounts is one tool an advisor can employ that can add value each year. (Potential value add: from up to 0.75%.) - Employing cost-effective investments. This critical component of every advisor's tool kit is based on simple math: Gross return less costs equals net return. (Potential value add: up to 0.45%.)
- Maintaining the
proper allocation through rebalancing . Over time, as its investments produce various returns, a portfolio will likely drift from its target allocation. An advisor can add value by ensuring the portfolio's risk/return characteristics stay consistent with a client's preferences. (Potential value add: up to 0.35%.) - Implementing a spending strategy. As the retiree population grows, an advisor can help clients make important decisions about how to spend from their portfolios. (Potential value add: up to 0.7%.)
How an advisor approaches two additional principals of wealth management -- asset allocation and total return versus income investing -- can also add value, but are too unique to each investor to quantify.
SHOW YOUR VALUE
By showing how the right financial advice can affect net returns, the Advisor's Alpha framework makes the value proposition of advisors more tangible. It's a very real number that can help in client conversations to reinforce the importance of sticking to a plan and following sound financial advice.
For advisors, being able to successfully communicate your value can free up time to focus on the pursuits that will make a bigger difference, such as
Fran Kinniry is principal of the Vanguard Investment Strategy Group, whose primary responsibilities are capital market research, portfolio design, development and implementation of customized investment solutions, investment market commentary, and research.
