To calculate this additional return, Vanguard found it is largely based on five wealth management principles. Although the exact amount of additional returns may vary depending on client circumstances and implementation, Vanguard found an advisor can add value by:- Being an effective behavioral 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%.)
- 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% to 0.75%.)
- 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%.)
- 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%.)
- 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%.)
Vanguard considered adding two additional principles, asset allocation and total return versus income investing. These areas can also add value, but they believe these areas are too unique to each investor to quantify.
This figure should not be viewed as an automatic annual increase. Vanguard’s research emphasizes that it is more likely to be intermittent, as some of the most significant opportunities to add value occur during periods of market duress or euphoria that tempt clients to abandon their well-thought-out investment plans.
In such circumstances, the advisor may have the opportunity to add tens of percentage points. Although this wealth creation will not show up on any client statement, it is real and represents the difference in clients’ performance if they stay invested according to their plan as opposed to abandoning it.
Click this link for the full report: https://pressroom.vanguard.com/press_release/Vanguard_Research_Quantifies_the_Value_of_Advice_3.10.2014.html
