If you expect an adviser to create an investment portfolio that will consistently outperform the markets, you are likely to face disappointment.
It is a reality that an adviser will almost inevitably struggle to add value for a client through market-timing and selection of securities - particularly after costs and taxes are taken into account. This mirrors the difficulty faced by the majority of actively-managed funds despite their experience and resources.
Fortunately, skilled financial advisers can potentially contribute significantly to their clients' investment long-term success in ways that have nothing to do with market-beating performance.
For the past 14 years, Vanguard's Investment Strategy Group in the US has studied what it terms "Adviser's Alpha". This is defined as the value that advisers can add through their wealth management and financial planning skills - guiding their clients in such areas as asset allocation, cost and tax efficiency, and portfolio rebalancing - and as behavioural coaches.
In other words, skilful advisers can add considerable value by using the best wealth-management practices together with personally encouraging their clients to adopt disciplined, long-term approaches to investing.
Vanguard just has released a new Australian edition of this classic investment research, using local data in an endeavour to quantify the direct value or "alpha" an adviser may add through such services.
The authors of the Australian report - including Francis Kinniry, a principal of Vanguard's Investment Strategy Group, conservatively estimate that "Adviser's Alpha" may add about three per cent, at least, to a client's net returns. Much, of course, will depend on an investor's circumstances.
For many investors, the best investment and wealth management strategies described in the report are likely to provide an annual benefit - such as from reducing investment costs and taxes. Nevertheless, the most significant value-adding opportunities would tend to occur intermittently and often during times of market duress or euphoria, according to the report.
During market duress or euphoria, advisers can act to urge their clients not to abandon carefully-prepared and appropriate long-term strategies in response to widespread market fear or greed.
Vanguard's report outlines six ways that adviser's can potentially add value that have no relationship to attempts to outperform any benchmarks:
Advisers can alert clients to the added risks of moving away from well-thought-out investment plan in an effort to maintain their yields.
Significantly, this Adviser's Alpha research should reinforce the qualities that investors should look for when choosing a financial adviser as well as reinforcing the fundamentals of sound investment practice.
By Robin Bowerman
Smart Investing
Principal & Head of Retail, Vanguard Investments Australia
25 February 2015
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