Vanguard Asset Managers conducted a UK study in 2014 and published the results in a white paper entitled “Putting a value on your value: Quantifying Vanguard Adviser’s Alpha in the UK”. Following that, Vanguard set up a programme for financial advisers that had been running very successfully in the US for many years.
The programme starts by defining Adviser’s Alpha as the difference between the return that investors might achieve with an adviser and the return that they might have achieved on their own. It then sets out seven key areas where advisers add value before estimating values for each area, arriving at a total Adviser’s Alpha figure of around 3% per annum.
It is important to say that the estimated average annual higher return of 3% p.a. is likely to be “Lumpy”. For example, although some elements of Adviser’s Alpha are annual and will be delivered smoothly, other significant parts – such as behavioural coaching – will come sporadically, chiefly at times of market stress or euphoria.
The programme provides tools and training to help advisers maximise their own alpha, so they can be confident in describing and demonstrating the value each adviser adds to their clients. These tools represent best practices that can influence the success of the adviser’s clients’ in achieving their goals.
The programme underlines the importance of trust and regular communication between advisers and their clients; these are the two vital ingredients that will ensure clients will listen to their adviser when they need them most.
Below is the table of the areas where Vanguard calculated advisers add value.
|Vanguard’s Adviser’s Alpha strategy modules||Module number||Value-add relative to “average” client experience (in basis points of return)|
|Suitable asset allocation using broadly diversified funds/ETFs||I||> 0 bps|
|Rebalancing||II||0 – 43 bps|
|Cost-effective implementation (expense ratios)||III||66 – 92 bps|
|Behavioural coaching||IV||150 bps|
|Tax allowances and asset location||V||0 – 23 bps|
|Spending strategy (withdrawal order)||VI||0 – 48 bps|
|Total-return versus income investing||VII||> 0 bps|
|Potential total value added||About 3%|
|Notes: Return value-add for Modules I and VII were deemed significant but too variable by individual investor to quantify.|