Written by Aaron Alston
The question many advisers get asked? What value can an adviser add to a client’s portfolio? It can be hard to quantify as it is very subjective and differs from individual to individual. A research paper was written by Vanguard to tackle this very subject in March 2019 titled “Putting a value on your value: Quantifying Vanguard Adviser’s Alpha”.
For many clients, entrusting your hard-earned money with a Financial Adviser can be a financial and emotional commitment. You are putting your trust in someone with the assumption that he or she will keep your best interests in mind. For advisers, putting a value on your value will always be subjective and unique to an individual client’s financial situation, circumstances, and needs. However, Vanguard have compiled a framework called the Adviser’s Alpha. Based on their analysis, they believe an adviser can add about 2-3% in net returns to an investor’s portfolio by using the below framework. See below.
Vanguard Adviser’s Alpha Strategy
- Asset Allocation
- Cost-effective implementation
- Behavioral coaching
- Asset location
- Withdrawal order for client spending from portfolios
- Total-return v income investing
- Asset Allocation
- Asset allocation refers to the % of a portfolio invested in various asset classes such as shares, property, fixed interest, bonds, and cash investments, according to an individual’s goals, risk profile and time horizon. Many investors can get the above wrong if they haven’t considered their short, medium and long-term goals and/or their overall appetite to risk.
- Asset Allocation and diversification are extremely important when considering a clients overall investment strategy.
- This simply refers to a client’s gross investment returns minus costs.
- Hudson’s investment committee meets regularly to review our investment options and model portfolios to ensure they are still suitable for our clients. Hudson have adopted a Core-Satellite investment philosophy.
- This approach to portfolio construction uses a combination of index (core) and actively managed funds (satellite). Index funds are generally lower cost & have lower management as they seek to track market returns v actively managed funds which seek to outperform the index and generally are higher cost and have higher management risk.
- The benefits of blending index and actively managed funds are reduced costs, diversification advantages and minimises overall fund manager risk whilst aiming to maximise return.
- Given the importance of investing in line with your risk profile, rebalancing ensures you are correctly invested in line with your original preferences.
- Markets move regularly and produce different returns which may drift your portfolio away from your target asset allocation.
- Example: Your adviser may recommend having 30% of your portfolio invested in the Australian equities market with an overall asset allocation of 70% invested in shares and 30% cash. If the Australian sector performs well and increases to 40% of your overall portfolio, you may be more vulnerable to market corrections as you have a larger proportion invested in the market (now 80% shares, 20% cash). Therefore, your adviser may recommend to “lock in the 10% gains” and rebalance your portfolio back to the original allocation to minimise risk.
- It is important to note that rebalancing is a strategy to minimise risk, rather than maximise return.
- Behavioral Coaching
- According to Vanguard, this is where an adviser can add potentially 1-2% in net return.
- Investing evokes emotions and you can have all the knowledge in the world with a goal to invest for the long term, however the minute the market drops 10%, you may feel inclined to sell.
- Advisers can help their clients maintain a long-term approach and “stay the course”. Many investors know the concept of “buy low” and “sell high” however the hard part can be sticking to this philosophy in the best and worst of times.
- Hudson’s philosophy has and always will be to invest for the long term. Markets will always fluctuate, however it’s important to stick to your plan and discuss any concerns with your adviser so they can remind you how the strategy is aligned to your goals and objectives.
5 & 6. Asset location and withdrawal order for client spending from portfolios
- The value an adviser can add will be dependent on an investors’ asset allocation and bucket size.
- Many Hudson clients who receive a regular pension payment through superannuation will know that all investment earnings and withdrawals are tax-free.
- The question is which investment do you withdraw your pension payments from?
- Hudson’s philosophy has generally been to implement a bucket strategy for retirees whereby you have approximately 3 years’ worth pension payments in a short term or defensive bucket. This means that if markets were down 20%, you are not dwindling your retirement savings by withdrawing from growth assets in a down market. You may also have a medium term and long-term bucket where your adviser will periodically liquidate from time to time to replenish or top up your short-term bucket as required.
- These strategies can be crucial because an adviser can reinforce that you have plenty of cash available to meet your income needs for 3 years whilst allowing the markets time to recover.
7.Total-return versus income investing
- According to Vanguard value is significant but too unique to quantify, based on each investor’s desired level of spending and portfolio composition.
- One individual may be a growth investor and have a retirement income need of $100,000 p/a v another individual who is a conservative investor with a retirement income need of $40,000 p/a. In the above example the composition of their retirement buckets will be vastly different. Your adviser can tailor a strategy appropriate to your specific financial position and individual circumstances.
- Vanguard believes by working with an adviser and implementing the Adviser’s Alpha framework for wealth management an adviser can potentially add 2-3% value over the longer term.
- Each individual investors circumstances are unique, so value will be subjective from client to client.
- Hudson’s advisery team adopt all the investment philosophies outlined in the framework to help each client reach their financial and lifestyle goals.
- A link to the research paper I have referenced throughout the document is here: https://intl.assets.vgdynamic.info/intl/australia/documents/resources/adviser/quantifying_adv_alpha.pdf