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Vanguard attempts to quantify value of advice

Vanguard has attempted to quantify the value of advice in a new whitepaper published today (27 November), as it launches a UK version of its adviser framework, Adviser’s Alpha.

The firm which has made its name in offering large, low-cost passive investment funds claimed advisers who use the service can add value by approximately 3 per cent in net returns per annum for their clients.

This added value figure was calculated by comparing the difference between the return investors might achieve with an adviser, against the return they might achieve on their own.

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While Vanguard admitted that the exact amount may vary depending on client circumstances and implementation, it suggested that an adviser can add value in several ways:

• being an effective ‘behavioural coach’, helping clients maintain a long-term perspective and a disciplined approach could potentially add up to 1.5 per cent;

• employing cost-effective investments: every pound paid for management fees, trading costs, and taxes is a pound less of potential return for clients and could potentially add up to 0.92 per cent;

• maintaining the proper allocation through rebalancing: managing portfolio drift from target allocation and acquiring new risk-and-return characteristics could potentially add up to 0.43 per cent;

• implementing a spending strategy: adviser can help with decisions about how to spend from client portfolios to minimise total taxes paid and could potentially add up to 0.48 per cent; and

• applying an asset location strategy: allocating between taxable and tax-advantaged accounts is one tool an adviser can employ and could potentially add: up to 0.23 per cent.

The firm added that while building a suitable asset allocation using broadly diversified funds was considered important, it was deemed too variable by individual investors to quantify.

Peter Westaway, one of the research’s authors and head of the European investment strategy group, commented that 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.

“We believe the Vanguard Adviser’s Alpha framework represents the best practices that advisers can use to help clients achieve their goals and give them the best chance for investment success.”