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Vanguard research qualifies the value of advice

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Financial advisors can add up to about three 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, Vanguard says.  

The research paper, Putting a Value on Your Value: Quantifying Vanguard Advisor Alpha, examines the individual best practices within the advisor’s Alpha framework and quantifies the value advisors can add relative to others who are not employing such practices.
 
“We believe advisors have the opportunity to meaningfully improve investor outcomes, and we are pleased to be able to provide advisors a mechanism to demonstrate their value to clients in a quantifiable manner,” says Francis Kinniry Jr, one of the study’s authors and a principal in Vanguard’s investment strategy group. “As the industry continues to evolve from a commission-based to a fee-based model, advisors who successfully explain their value have more time to serve clients, leading to increased client satisfaction and retention.”
 
Calculating how much an advisor can add in net returns is based largely on their approach to five wealth management principles. Although the exact amount may vary depending on client circumstances and implementation, 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: up to 1.50 per cent.)
 
· 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 per cent to 0.75 per cent.)
 
· 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: up to 0.45 per cent.)
 
· 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: up to 0.35 per cent.)
 
· 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: up to 0.70 per cent.)
 
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.
 
Vanguard Advisor’s Alpha framework incorporates all of these principles, making it possible for advisors to add up to about three per cent in net returns for their clients. 

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