Bud Fox: The value of enduring advice

Five years have come and gone since the market hit bottom during the financial crisis. Nearly every investor who went through that period came away with a few important lessons. For many, the lessons are shaded with regret. Others are still searching for the right lesson; lessons buried under alternate histories of what could have been. For those who had a prudent voice guiding them to stay the course, the lessons are likely more enduring.

When we came up with the Vanguard Advisor’s Alpha™ concept more than a decade ago, we had these time-tested principles in mind: diversification, balance, and discipline. Back then, the conventional wisdom associated good financial advice with the ability to deliver market outperformance. Recognizing that wealth management is more complex and greater value could be generated by refocusing financial planning on long-term rather than year-to-year results, we steered the conversation of financial advice to enduring principles.

Using a client-relationship-focused model, Vanguard Advisor’s Alpha equips the industry with the tools to evolve the financial planning practice and, as a result, helps to redefine the value proposition of advisors.

Many advisors already practice these principles. Still, we felt that more could be done to demonstrate the value of this guidance so both clients and advisors could fully realize the benefit of embracing the Vanguard Advisor’s Alpha model.

Making the value of advice more concrete

Naturally, the next step was to put a number on the value of that advice—a value that, while real, is much easier to describe than define. After all, what was the value of keeping a client on course during the financial crisis? Such value is easier pegged by words than numbers.

In our quest, we did extensive research to quantify how much could potentially be added to clients’ net returns by implementing the Vanguard Advisor’s Alpha framework.

We came up with “about 3%.” Simply put, advisors can add “about 3%” in net returns when comparing the projected results of a portfolio that is managed using well-known and accepted best practices for wealth management with those of portfolios that are not.

The math behind the “3%” was the simple part and can be found in the recently published white paper, Putting a value on your value: Quantifying Vanguard Advisor’s Alpha.

The real work was framing the wealth management principles in a manner that would help advisors describe the value of their services to clients as clearly as possible. By showing how the Vanguard Advisor’s Alpha framework can affect net returns, we make the value proposition of advisors more tangible.

Obviously, the value will vary according to each client’s circumstances and from year to year. Nonetheless, it’s a number that is very real and can help in client conversations to reinforce the importance of sticking to a plan and following sound financial advice.

For advisors, being able to successfully communicate your value can free up time to focus on the pursuits that will make a bigger difference, such as strengthening client relationships and helping clients achieve their goals. In turn, your practice can benefit by having more satisfied clients and greater asset retention. From that standpoint, we believe the Vanguard Advisor’s Alpha framework is not only good for your clients but also good for your business.

Detailed information is included in our white paper, but here’s a summary of how the value of Vanguard Advisor’s Alpha breaks down: