Putting a value on your value

  • The value proposition of advice is changing. The nature of what investors expect from advisors is changing. And fortunately, the resources available to advisors are evolving as well.
  • In creating the Vanguard Advisor’s Alpha concept in 2001, we outlined how advisors could add value, or alpha, through relationship-oriented services such as providing cogent wealth management via financial planning, discipline, and guidance, rather than by trying to outperform the market.
  • Since then, our work in support of the concept has continued. This paper takes the Advisor’s Alpha framework further by attempting to quantify the benefits that advisors can add relative to others who are not using such strategies. Each of these can be used individually or in combination, depending on the strategy.
  • We believe implementing the Vanguard Advisor’s Alpha framework can add about 3% in net returns for your clients and also allow you to differentiate your skills and practice. Like any approximation, the actual amount of value added may vary significantly, depending on clients’ circumstances.

The value proposition for advisors has always been easier to describe than to define. In a sense, that is how it should be, as value is a subjective assessment and necessarily varies from individual to individual. However, some aspects of investment advice lend themselves to an objective quantification of their potential added value, albeit with a meaningful degree of conditionality. At best, we can only estimate the “value-add” of each tool, because each is affected by the unique client and market environments to which it is applied.

As the financial advice industry continues to gravitate toward fee-based advice, there is a great temptation to define an advisor’s value-add as an annualized number. Again, this may seem appropriate, as fees deducted annually for the advisory relationship could be justified by the “annual value-add.” However, although some of the strategies we describe here could be expected to yield an annual benefit—such as reducing expected investment costs or taxes—the most significant opportunities to add value do not present themselves consistently, but intermittently over the years, and often during periods of either market duress or euphoria.

These opportunities can pique an investor’s fear or greed, tempting him or her to abandon a well-thought-out investment plan. In such circumstances, the advisor may have the opportunity to add tens of percentage points of value-add, rather than mere basis points,1 and may more than offset years of advisory fees. And while the value of this wealth creation is certainly real, the difference in your clients’ performance if they stay invested according to your plan, as opposed to abandoning it, does not show up on any client statement.

For the full article: