Many people have difficulty understanding the value that a financial advisor provides beyond the ubiquitous “peace of mind”. To address this conundrum, Vanguard did extensive research to quantify how much could potentially be added to clients’ net returns by working with an advisor using a client-relationship focused model.
Vanguard’s research culminated in a published report: “Putting a value on Your Value: Quantifying Vanguard Advisor’s Alpha”. Vanguard 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 that are not. This 3% should not be viewed as an annual value-add. In some years it will be more and in others less. Some of the most significant opportunities to add value occur when clients are tempted to abandon their well-thought-out investment plan. This often occurs during periods of market duress or euphoria.
How, you may ask, does an advisor go about adding 3% in net returns? Vanguard identified five ways in which an advisor can add value:
- Being an effective behavioral coach. Helping clients maintain a long-term perspective and a disciplined approach to investing can add up to 1.5% in annual net returns.
- Applying an asset location strategy. Allocating between taxable and tax-advantaged accounts can add up to 0.75% in annual net returns.
- Employing cost-effective investments. This one is based on simple math. Gross return less costs equals net return. This strategy can add up to 0.45% in annual net returns.
- Maintaining the proper allocation through rebalancing. Over time, a portfolio will likely drift from its target allocation. By rebalancing the portfolio on a regular basis, an advisor can ensure that the portfolio’s risk/return characteristics stay consistent with a client’s preferences and as a result add up to 0.35% in annual net returns.
- Implementing a spending strategy. It’s not how much you earn that matters, it’s how much you keep. By helping clients make important decisions about how to spend from their portfolios, advisors can add up to 0.7% in annual net returns.
Although every advisor has the ability to add this value, the extent of the value will vary based on your unique situation and the way the assets are actually managed. At Encore Wealth Advisors, we are here to listen to your concerns, counsel you, and guide you on the right path, adding value throughout the course of our relationship.
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