The Value of an Advisor Part One: 7 Strategies to Quantifying the Value

An 8 part series exploring the value that a fiduciary advisor may bring to client relationships

Most, if not all, fiduciary advisors are confident they are able to deliver significant value to clients through relationship-oriented services such as providing cogent wealth management via financial planning, discipline and guidance rather than by trying to outperform the market. Until recently, this value proposition has been relatively easy to describe but quite difficult to define.

Quantifying Value of an Advisor

The mutual fund giant Vanguard, through its Advisor’s Alpha® study, has helped fee-based advisors quantify the value that we are able to deliver when employing seven specific advising strategies. Incidentally, these strategies (among many other ways of delivering value) have been followed by Claris Advisors since our inception. The strategies are outlined below:

  • Asset location: the allocation of assets between taxable and tax-advantaged accounts.
  • Asset allocation: the percentage of a portfolio invested in various asset classes – proven to be the most important determinant of return variability and long-term performance.
  • Cost-effective implementation: the utilization of low-cost funds and investment strategies.
  • Rebalancing: the act of correcting asset allocation drifts within evidence-based parameters.
  • Behavioral coaching: the lifelong work of an advisor to help clients resist their emotional instincts and stick with the financial plan.
  • Spend down strategy: withdrawal order strategies that minimize the total taxes paid over the long-term.
  • Total return vs. income investing: building portfolios to take advantage of the total return of broad asset classes rather than focusing on only dividend and income producing securities.

Vanguard’s analysis calculates that advisors that follow the strategies outlined in the study can potentially add 3% (and in some cases more) to a client’s net average annual returns. It is crucial to note that this improvement should not be expected annually; rather, it is likely to be very lumpy. Advisors are able to be of the most value to their clients when markets are experiencing either extreme duress or euphoria. As one may expect, these are the times where investment and financial plans are most severely tested. Further, this is not value added through shrewd stock selection and market timing as evidence is very clear that these two factors are nearly impossible to deliver with any consistency.

We will explore all seven different, quantifiable and evidence-based aspects of what a client should expect from a good advisor. Look for our next blog where we analyze the value to clients when an advisor locates specific asset classes in the optimal account type. If you have any questions about the value an advisor can bring contact Claris.

Read Part 2: Asset Location
Read Part 3: Asset Allocation

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