Advisor's Alpha: Why Invest With An Advisor?
In 2001, Vanguard, the mutual fund behemoth based in Valley Forge, PA, created the concept of “Vanguard Advisor’s Alpha” to describe the potential value that financial advisors can add through financial planning, discipline and ongoing guidance. In other words, they were attempting to quantify the benefit that a financial advisor’s clients receive above and beyond the performance of the investments in their accounts relative to others who are not using such strategies.
While Vanguard estimates this value at about 3% in net returns per year, it is undoubtedly impossible to quantify. In fact, the number will be different for each client based on the skills of the advisor, the level of engagement between the client and advisor, the complexity of the client’s circumstances and the client’s perception of the value they are receiving.
In arriving at a 3% estimate of “Advisor’s Alpha,” Vanguard cites a number of potential benefits that a financial advisor can offer. I highlight them below, along with a description of how I help clients in each area.
Asset Allocation – It is widely accepted that a portfolio’s asset allocation - the percentage of a portfolio invested in various asset classes such as stocks, bonds, and cash alternatives, according to the investor’s financial situation, risk tolerance, and time horizon - is the most important determinant of the long-term performance of a broadly diversified portfolio. I work with my clients to determine and implement the proper allocation to help ensure that they will be in the best position possible to work towards their long-term financial goals. Asset allocation does not ensure a profit or protect against a loss.
Cost-Effective Portfolio Implementation – I believe that cost-effective implementation is a critical component of every advisor’s tool kit and is based on simple math: Gross return minus costs (expense ratios, trading or frictional costs, and taxes) equals net return.
Rebalancing – Rather than systematically rebalancing all client accounts based on a model, I believe in opportunistically rebalancing each individual portfolio based on both market conditions and client circumstances.
Behavioral Coaching – It’s easy to stay the course when the market is steadily rising and to say you’ll stay invested next time the market crashes. It’s also easy to say that you won’t chase performance when the next hot asset class is all the rage. But every investor is tempted to make drastic portfolio decisions based on fear, greed or simply “missing out.” I believe there is tremendous value in working with an experienced advisor to help you avoid emotional decisions, particularly during periods of market turbulence.
Asset Location – Once a sound asset allocation strategy is in place, I often help clients decide which accounts should hold which assets. For example, a retiree with both a traditional IRA and a Roth IRA may benefit from allocating the Roth IRA 100% to equities and locating the fixed income allocation in the traditional IRA because the Roth will never be subject to required minimum distributions or income taxes no matter how large the balance grows. The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
Spending Strategy – For clients transitioning to retirement, knowing which accounts to draw “income” from and in what order can save a tremendous amount in taxes and potential growth. I frequently help clients devise a withdrawal strategy as retirement approaches.
Opportunity Cost of Your Time – Many of my clients previously managed their own portfolios but ultimately decided to devote their time to other endeavors, often simply enjoying retirement. My goal is to provide clients the confidence of knowing that their portfolio is being professionally managed and that they have a trusted financial advocate working on their behalf.
I encourage you to get in touch for advice related to any financial matters, not just portfolio decisions. I regularly offer guidance related to life and disability insurance, long-term care insurance, Social Security, stock options, saving for college, estate planning and various other areas.
Disclosures:
The projections made in the “Vanguard Advisor’s Alpha” study are hypothetical in nature, do not reflect the deduction of fees and charges inherent to investing, are not representative of any specific situation, and are not guarantees of future results. Your results will vary.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. We suggest that you discuss your specific situation with your financial advisor prior to investing.
Investing involves risk including loss of principal.
No strategy assures success or protects against loss.