Vanguard Adviser's Alpha - Differentiate yourself

 

What is Vanguard Adviser's Alpha?

The essence of Adviser's Alpha is that consistent market outperformance is unrealistic and that your clients will value—and benefit from—the holistic wealth management you provide. By shifting your primary focus away from outperforming the market and toward personalised client goals and controllable, relationship-oriented services, you can deepen and strengthen your connections with clients. This can also lead to more referrals and less client attrition.

Vanguard Adviser's Alpha explained (2:36)

Advisers' compensation structure is evolving, so should they reconsider their value proposition?

 

Top-down portfolio construction and low costs

Since you can't control the market, the Vanguard Adviser's Alpha model encourages you to focus on what you can control—tax efficiency, diversification and cost.

By constructing portfolios around a core of low-cost index funds with actively managed satellites, rather than acting as a stock picker, you'll free up time to expand your role as financial guide and teacher. This approach creates an opportunity to help clients understand critical investment concepts and create plans based on their goals.

Deep and lasting client relationships: Define value proposition - Portfolio construction - Recoup time - Behavioural coaching - Loyalty/retention - Wealth management

Behavioural coaching

Help clients ignore market ‘noise’ by explaining how a balanced portfolio can withstand the ups and downs of the market over the long term.

The Vanguard Adviser's Alpha model emphasises coaching, helping clients stick to their financial plans when emotions run high and preventing short-term stress from getting in the way of reaching long-term goals.

Holistic wealth management

The key to differentiating your practice may be positioning yourself at the centre of clients' financial lives, taking the time to gain a 360-degree view of their financial relationships and offering your practice as a hub for an array of value-added services.

Clients view investing in terms of their life goals, such as retirement independence, and they depend on you to be a trustworthy, attentive guide on their path toward these goals. High-net-worth clients are hungry for these services and may be willing to pay a premium for them.

Quantify your value

We think Vanguard Adviser's Alpha can add around 3% to your client's portfolios.

The value you can add may not be easily quantifiable. It doesn't appear on your client's quarterly statement. And it may not happen at the same rate in all market conditions. But it's real nonetheless.

The adviser value proposition (5:13)

With competition increasing, financial advisers can benefit from Vanguard's products, tools, and services.

"About 3%" defined

Here's a high-level summary of Vanguard Adviser's Alpha best practices and the approximate range of value we believe you can add by incorporating them.

Adviser's Alpha adds about 3% through portfolio construction, behavioural coaching and wealth management

Using Vanguard Adviser's Alpha to quantify your value

Vanguard Adviser's Alpha strategy

Potential value*

Source: Ryan Rich, Colleen M Jaconetti, Francis M. Kinnery Jr., Donald G. Bennyhoff, and Yan Zilbering, 2015. Putting a value on your value: Quantifying Vanguard Advisor's alpha in Canada. Valley Forge, Pa. The Vanguard Group, Inc.

Notes: For "Potential value added," we did not sum the values because there can be interactions between the strategies. bps = basis points.

Suitable asset allocation using broadly diversified managed funds/ETFs > 0 bps
Cost-effective implementation (expense ratios) 75 bps
Rebalancing 42 bps
Behavioural coaching 150 bps
Tax efficiency > 0 bps
Total returns versus income investing > 0 bps
*Potential value added "About 3%"

Portfolio construction

These portfolio construction techniques let you focus on what you can control—costs, diversification and tax efficiency.

Cost-effective implementation means saving clients money through low-cost managed funds and exchange traded funds. You minimise taxes through asset location, picking the right products depending on your client's tax status.

The values of asset allocation and total-return investing are difficult to estimate, but they are significant and help reduce risk.

Aggressive portfolios focused on growth can experience high volatility in market downturns. Conservative portfolios focused on income also face risks, especially during periods of rising interest rates when bonds may lose value. Diversified portfolios based on long-term strategic asset allocation usually experience less volatility and help smooth returns.

Wealth management

Effective wealth management puts you at the centre of your clients' financial lives and lets you take a 360-degree view of their financial needs. An effective spending strategy helps retirees withdraw money in the most tax-efficient manner. Rebalancing can improve a portfolio's risk-adjusted returns compared with those of a portfolio that is not rebalanced over time.

Behavioural coaching

When emotions run high, helping clients stick to their financial plans can be a challenge. Persuading clients to stick with a stock allocation after the market drops or keeping them from piling into equities after the market hits new highs can save them money. That's because cash flows tend to follow, not precede, higher returns due to performance chasing. Through behavioural coaching, Vanguard believes you can add 150 basis points, if not more, over time.

Becoming a behavioural coach (5:11)

Vanguard Principal Fran Kinniry and Vanguard Senior Investment Analyst Don Bennyhoff give tips for helping clients meet their financial goals.

Vanguard Adviser's Alpha is a win–win

  • Your clients benefit through greater peace of mind knowing that their portfolio risks have been reduced, they can always turn to you for guidance and potentially get to keep more of their returns.
  • Your business benefits from increased client balances over time and loyalty, which can lead to more referrals, new clients and a larger asset base.

Start the conversation

Here are ideas to help you build a convincing case for your transition to a successful Vanguard Adviser's Alpha model.

Control what you can

The essence of the Vanguard Adviser's Alpha concept is that a client relationship based on consistent market outperformance is unrealistic. You've been successful when you've convinced clients that the smartest way to invest is to control costs, be broadly diversified, and have a good financial plan and stick with it.

Start with a plan and stick with it

A carefully conceived financial plan is a must-have. It includes short- and long-term objectives, risk preference and anticipated savings rate. It's the blueprint that spells out the details of a client's financial well-being, including a desired return rate.

The plan requires and enforces discipline in both up and down markets. It lets you provide meaningful counsel that can reduce anxiety, confirm progress and keep clients on track.

Set expectations about returns

The planning process should result in an estimate of your clients' investment returns. Effective coaching can help clients appreciate the nature of risk and return as you help them distinguish between the returns they desire and the returns they require to reach their goals.

Helping clients appreciate that difference can prove beneficial for you as well. A required-return allocation lets you employ strategies that reduce the need for excessive allocations to risky investments and the pressure to kick investment goals. For many clients, sticking with a more conservative allocation tied to their required return lowers portfolio volatility and gives them the confidence to remain invested for the long term.

Lessons learned (2:40)

How can you help clients stick to their investment plans despite inevitable urges such as chasing performance or fleeing a bear market?

 

Help clients stick to their plans

The first steps in developing a meaningful advisory relationship are to engage clients in thoughtful, two-way conversations about their financial goals and to help them create realistic financial plans. The next step is more challenging: helping clients stick to their plans when emotions run high.

Part 6: Helping clients stay the course (5:49)

As a behavioural coach, how can you convince your clients to stay the course?

The adviser as emotional circuit breaker

Investors who flee the markets during times of stress miss both the lows and the highs. You have the unique opportunity to act as an emotional circuit breaker during bull and bear markets, circumventing clients' tendencies to chase returns or run for cover. By recognising and addressing clients' emotional needs, you can steer them through turbulent periods, preventing short-term stress from getting in the way of reaching their long-term goals.

Four techniques for success

1. Educate and set expectations

According to Vanguard research, behaviours that can lead investors astray recede when advisers communicate with and educate clients. Your clients need to fully understand each step in the investment process, from setting goals and time frames to choosing and rebalancing assets to addressing tax implications and drawing income. This knowledge may provide a counterbalance to clients' emotions during times of stress.

2. Make the financial plan an anchor

The financial plan you design and agree on with clients should be central to every conversation. It should reflect not only long-term goals but also your in-depth exploration of risk scenarios. A collaborative plan can serve as an important emotional anchor when clients feel panicked or are hungry for gains. Reminding clients that their asset allocation was the result of careful consideration may help them regain perspective.

3. Practise emotional sensitivity

Your job doesn't end when you make investment recommendations. The success of your efforts may depend on getting clients to stick to these recommendations. Don't discount emotional reactions; rather, use them as another avenue for communication. If you focus solely on reason, clients will feel you're being indifferent. Try to acknowledge their emotions and then explain the reasons for your recommendations. Compromise rather than an all-or-nothing approach can help clients feel comfortable on an emotional level while remaining on track to reach their long-term objectives.

4. Widen the frame

With this behavioural technique, your goal is to refocus clients' attention on the performance of their entire portfolios, beyond an individual investment or asset class. Coach your clients to evaluate progress toward long-term goals rather than concentrate on recent returns. When a particular asset is underperforming, it's important to show how other parts of the portfolio are contributing. As you know, short-term volatility and negative returns can overshadow a positive long-term trend. By showing clients the big picture, you can help them work through moments of emotional crisis and stay committed to their broader financial strategy.

Reaping dividends for your practice

Integrating behavioural coaching may require an adjustment to your usual day-to-day business processes—as well as a bit of practice. Yet the benefits run deep: You can help clients develop and practise willpower, see the big picture and attain the outcomes they desire. Their resulting satisfaction can produce significant dividends for your business in the form of loyalty and referrals. Advisers who adopt coaching techniques reap rewards not only through these deeper, ‘stickier’ client relationships but also by offering stronger, differentiated practices in today's challenging marketplace.

Adviser's Alpha tool kit

With materials designed to help articulate the value of your advice and accompanying client notes, the Vanguard Adviser's Alpha tool kit is your tools for success.

Order a tool kit

Tools for you

Tools for you

  • How to start the Adviser's Alpha conversation
  • Help clients understand the value of portfolio construction
  • Add value through wealth management
  • Help clients stick to their long-term investment plans
Tools for your clients

Tools for your clients

  • Appreciate the trade-off between risk and return
  • Consider the big picture during periods of market stress
  • Engage in meaningful conversations with your financial adviser
  • Learn about how your adviser adds value

Order a tool kit

Related materials

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