Financial advisers could add value to the tune of 3 percent in net returns each year, according to a research note from Vanguard.
The whitepaper from the asset manager called, Adviser’s Alpha: Putting a value on your value, sets out seven key practices whereby advisers can add value and provides estimated values for each area.
Some of the reasons, which were laid out by Vanguard are listed below:
The behavioural coach: That is, helping investors maintain a long-term perspective and disciplined approach.
Vanguard considered this one of the most important elements of financial advice in any market environment with it adding a potential value of up to 1.50 percent.
Marc Faber also recently highlighted the importance of being disciplined when investing. He said: “The key in my view, for a successful investor, is to decide upon a strategy and then implement the strategy with discipline and not continuously change their view. Someone who invests has to decide on a strategy and implement the strategy with discipline
Watch the costs: Financial advisers should use cost-effective investments. The paper stated that every pound paid for management fees, trading costs, and taxes is a pound less of potential return for clients. Gross return, less costs equals net return.
The potential value added could be up to 0.92 percent.
Rebalance the portfolio to minimise risk: Vanguard explains that over time, a portfolio’s investments produce various returns, which can have the impact of 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 added of between 0 percent to 0.43 percent.
Have a spending strategy. With the population living longer, financial advisers can help retiree investors make the important decisions about how to spend from their portfolios enabling them to minimise total taxes paid and increase the longevity of their portfolios.
Potential value add: 0 percent to 0.48 percent.
Know your tax accounts: The allocation of assets between taxable and tax-advantaged accounts is can help with optimal portfolio construction from a tax perspective. It 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 added can be from 0 percent up to 0.23 percent.
Vanguard’s note highlighted that two other practices - building a suitable asset allocation using broadly diversified funds/exchange traded funds and total-return versus income investing – while important were deemed too variable by individual investor to quantify.
Peter Westaway, one of the research authors and head of the European investment strategy group, commented, “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.”