Everyone beats the drum on best practices, but what is the value in following those to the letter? If you ask one investment management company, it can add 3 per cent in net returns for the client.
A research paper for financial advisors recently released by Vanguard Investments Canada Inc. reveals that financial advisors can add about 3 per cent in net returns for their clients using Vanguard Advisor’s Alpha, a wealth management framework that focuses on portfolio construction, behavioural coaching, asset location and other relationship-oriented services.
“Partly the result of the Client Relationship Model reforms being implemented in Canada, greater fee transparency will make it even more important for advisors to successfully communicate their value,” says Atul Tiwari, managing director of Vanguard Investments Canada Inc., “a value that, while real, is much easier to describe than define. This study attempts to define that value and make it more tangible.”
The paper, “Putting a Value on Your Value: Quantifying Vanguard Advisor Alpha
,” examines the individual best practices to improve client outcomes and quantifies the value that advisors can add relative to others who are not employing such practices.
Calculating how much an advisor can add in net returns is based largely on the researchers' approach to five wealth management principles. While the exact amount may vary depending on client circumstances and implementation, says Tiwari, an advisor can add value by:
Being an effective behavioural 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: 1.50%.);
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 0% to 0.42%.);
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: 1.31%.);
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: 0.47%.); and
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: 0% to 0.41%.).
How an advisor approaches two additional principles, asset allocation and total return versus income investing, can also add value, but are too unique to each investor to quantify, says Tiwari. Vanguard’s Advisor’s Alpha framework incorporates all of these principles, making it possible for advisors to add about 3 per cent in net returns for their clients.