Fnancial advisers could add value by approximately three per cent in net returns per annum for their clients using the Vanguard Adviser’s Alpha framework.
That’saccrodeg to a new white paper, Adviser’s Alpha: Putting a value on your value, released by Vanguard Asset Management .
The Vanguard Adviser’s Alpha framework is a tried and tested programme that has run in the US for over ten years. The UK version of the programme was officially launched at the firm’s annual investment symposium held in London today. The programme starts by defining Adviser’s Alpha as the difference between the return that investors might achieve with an adviser and the return they might achieve on their own. It then sets out seven key practices whereby advisers can add value and provides estimated values for each area.
While the exact amount may vary depending on client circumstances and implementation, an adviser 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 through any market environment. (Potential value add: up to 1.50%.)
• Employing cost-effective investments. Every pound paid for management fees, trading costs, and taxes is a pound less of potential return for clients. This component is based on simple maths: Gross return less costs equals net return. (Potential value add: up to 0.92%.)
• Maintaining the proper allocation through rebalancing. Over time, a portfolio’s investments produce various returns, resulting in the portfolio drifting from its target allocation and acquiring new risk-and-return characteristics that may be inconsistent with the portfolio’s original goals. An adviser can add value by rebalancing the portfolio to minimise risk. (Potential value add: 0% to 0.43%.)
• Implementing a spending strategy. An adviser can help the growing population of retiree clients make important decisions about how to spend from their portfolios to minimise total taxes paid and increase the longevity of their portfolios. (Potential value add: 0% to 0.48%.)
• Applying an asset location strategy. The allocation of assets between taxable and tax-advantaged accounts is one tool an adviser can employ. Optimal portfolio construction from a tax perspective might involve holding tax-efficient broad-market equity investments in taxable accounts, while broad-market bonds are held in tax-advantage accounts such as ISAs and pensions. (Potential value add: from 0% to 0.23%.)
It is important to highlight that, while two of the value-add practices (namely building a suitable asset allocation using broadly diversified funds/Exchange Traded Funds and total-return versus income investing) are considered important, they were deemed too variable by individual investor to quantify.
Peter Westaway, one of the research authors and head of the European investment strategy group, says: “The Retail Distribution Review has changed the adviser value proposition. Clients have greater clarity on the fees they are paying and, unsurprisingly, they want to know that they are receiving good value for money. We believe the Vanguard Adviser’s Alpha framework represents the best practices that advisers can use to help clients achieve their goals and give them the best chance for investment success.”