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Vanguard research quantifies the value of advice

Vanguard | 24 February 2015


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New research from Vanguard's Investment Strategy Group reveals that Australian financial advisers can add about 3 per cent in net returns for their clients by focusing on key wealth management topics, including asset allocation, behavioural coaching and cost-effective implementation, as well as other relationship-oriented services.

The research paper from Vanguard, Putting a value on your value: Quantifying Vanguard Adviser's Alpha, explores the individual best practices within Adviser's Alpha, a wealth management framework that Vanguard originally launched in the United States in 2001. The new research extends Vanguard's initial 2012 work on Adviser's Alpha in Australia, and uses local data to examine six "quantification modules" that outline where advisers can add direct value for clients.

Francis Kinniry Jr., one of the paper's authors and a principal in Vanguard's Investment Strategy Group, is in Australia to present the research and said, "We believe advisers have the opportunity to meaningfully improve investor outcomes by focusing on the most important levers, and we are pleased to be able to provide advisers a mechanism to demonstrate their value to clients in a quantifiable manner."

Commenting on the research Michael Lovett, Vanguard Australia Head of Distribution said, "With the compensation structure for advisers evolving from a commission or transaction-based system to a fee-for-service framework, retaining clients and developing deeper client relationships is paramount.

"This research highlights that the value of good financial advice is much broader than investment selection, and presents tangible strategies to help advisers strengthen their client relationships and define a unique value proposition."

Calculating how much an adviser can add in net returns is based largely on their approach to six wealth management best-practices. Although the exact amount may vary depending on client circumstances and implementation, an adviser can add value in the following areas:

Behavioural coaching:
 
As investing evokes emotion, advisers need to help their clients maintain a long-term perspective and a disciplined approach. Abandoning a planned investment strategy can be costly.

Cost-effective implementation:
 
Research has repeatedly shown that low costs are associated with better investment performance, and are a critical component of every investor's tool kit.

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.

Asset allocation:
 
Asset allocation and diversification are two of the most powerful tools advisers can use to help their clients achieve their financial goals and manage investment risk.

Tax efficiency:

Advisers can help their clients formulate a savings strategy to ensure their clients are making the most of tax-advantaged savings opportunities; advisers can also implement those plans in a tax sensitive manner.

Total-return versus income investing:
 
Vanguard believes in maintaining a broadly diversified portfolio and following a total-return approach considers both components of total return: income plus capital appreciation. The potential advantages of this approach include less risk and a longer lifespan for the portfolio.

The Adviser's Alpha framework incorporates all of these principles, making it possible for advisers to add up to about 3 per cent in net returns for their clients.

Although this value will not show up on any client statement, it is real and represents the difference in clients' performance when they remain disciplined and focused on financial goals over longer-term periods of time.

Full details of the research can be found in the white paper Putting a value on your value: Quantifying Vanguard Adviser's Alpha. (Download PDF).