Adviser's alpha The true value of financial advice

Vanguard | 22 February 2011


What premium does quality financial advice add to the outcomes for investors and how can advisers best demonstrate this to their clients?

Mr. Francis Kinniry, a Principal of Vanguard’s Global Investment Strategy Group, who developed the concept of 'Advisers Alpha’ a number of years ago and recently co- authored a research paper of the same title, is visiting Australia this week speaking to advisers about this paper which asks: 'What additional value (or 'alpha’) is gained for investors when they work with a financial adviser?’

"We wanted to explore the advice value proposition through multiple lenses, including the key question of what is the opportunity cost for investors of not working with a financial adviser," Mr Kinniry said.

Mr Kinniry has called on advisers to consider a new value proposition based on alternative skills and expertise.

In his Adviser’s Alpha model, added value is demonstrated by the adviser’s ability to effectively act as a wealth manager, financial planner and behavioural coach – providing discipline and reason to clients who are often undisciplined and emotional – rather than by efforts to beat the market.

"Demonstrating value for advisers will become increasingly important as the compensation structure evolves from a transaction-based system to a fee-based, asset management framework," Mr Kinniry said. "However, providing a well-considered investment strategy and asset allocation is as important as an adviser’s investment acumen and ability to deliver better returns than the markets."

"While adding value is the goal, advisers may be better served by changing their performance benchmark from market returns, to returns that investors might achieve on their own, without professional guidance."

Rather than investment capabilities the Adviser’s Alpha model relies on the experience and stewardship that the adviser can provide. The model focuses on asset allocation, rebalancing, tax efficient investment strategies, cash flow management and, when appropriate, coaching clients to change nothing at all, rather than relying on market outperformance.

Historically, many advisers have sought to add value through active strategies such as tactical asset allocation, fund selection and rotation and securities selection - despite the mounting evidence suggesting that these efforts will help neither their clients nor themselves in the long run.

"A value proposition based on outperforming the market places the adviser at a meaningful disadvantage," Mr Kinniry said. "Not only does success depend on factors outside of the adviser’s control, but it can also promote a 'horse-race’ mentality among clients, leading them to depart if the promised outperformance does not materialise."

"The benefit and wisdom of not allowing near term market actions to result in the abandonment of a well thought-out investment strategy can be underappreciated in the moment," he said.

For a full copy of Vanguard’s Adviser’s Alpha research paper visit