Help clients ignore market ‘noise’ by explaining how a balanced portfolio can withstand the ups and downs of the market over the long term.
The Vanguard Adviser's Alpha model emphasises coaching, helping clients stick to their financial plans when emotions run high and preventing short-term stress from getting in the way of reaching long-term goals.
The key to differentiating your practice may be positioning yourself at the centre of clients' financial lives, taking the time to gain a 360-degree view of their financial relationships and offering your practice as a hub for an array of value-added services.
Clients view investing in terms of their life goals, such as retirement independence, and they depend on you to be a trustworthy, attentive guide on their path toward these goals. High-net-worth clients are hungry for these services and may be willing to pay a premium for them.
The value you can add may not be easily quantifiable. It doesn't appear on your client's quarterly statement. And it may not happen at the same rate in all market conditions. But it's real nonetheless.
|Vanguard Adviser's Alpha strategy||Potential value*|
|Suitable asset allocation using broadly diversified managed funds/ETFs||0bps|
|Cost-effective implementation (expense ratios)||75bps|
|Total returns versus income investing||0bps|
|*Potential value added||"About 3%"|
Source: Ryan Rich, Colleen M Jaconetti, Francis M. Kinnery Jr., Donald G. Bennyhoff, and Yan Zilbering, 2015. Putting a value on your value: Quantifying Vanguard Advisor's alpha in Canada. Valley Forge, Pa. The Vanguard Group, Inc.
Notes: For "Potential value added," we did not sum the values because there can be interactions between the strategies. bps = basis points.
These portfolio construction techniques let you focus on what you can control—costs, diversification and tax efficiency.
Cost-effective implementation means saving clients money through low-cost managed funds and exchange traded funds. You minimise taxes through asset location, picking the right products depending on your client's tax status.
The values of asset allocation and total-return investing are difficult to estimate, but they are significant and help reduce risk.
Aggressive portfolios focused on growth can experience high volatility in market downturns. Conservative portfolios focused on income also face risks, especially during periods of rising interest rates when bonds may lose value. Diversified portfolios based on long-term strategic asset allocation usually experience less volatility and help smooth returns.
Effective wealth management puts you at the centre of your clients' financial lives and lets you take a 360-degree view of their financial needs. An effective spending strategy helps retirees withdraw money in the most tax-efficient manner. Rebalancing can improve a portfolio's risk-adjusted returns compared with those of a portfolio that is not rebalanced over time.
When emotions run high, helping clients stick to their financial plans can be a challenge. Persuading clients to stick with a stock allocation after the market drops or keeping them from piling into equities after the market hits new highs can save them money. That's because cash flows tend to follow, not precede, higher returns due to performance chasing. Through behavioural coaching, Vanguard believes you can add 150 basis points, if not more, over time.
The essence of the Vanguard Adviser's Alpha concept is that a client relationship based on consistent market outperformance is unrealistic. You've been successful when you've convinced clients that the smartest way to invest is to control costs, be broadly diversified, and have a good financial plan and stick with it.
A carefully conceived financial plan is a must-have. It includes short- and long-term objectives, risk preference and anticipated savings rate. It's the blueprint that spells out the details of a client's financial well-being, including a desired return rate.
The plan requires and enforces discipline in both up and down markets. It lets you provide meaningful counsel that can reduce anxiety, confirm progress and keep clients on track.
The planning process should result in an estimate of your clients' investment returns. Effective coaching can help clients appreciate the nature of risk and return as you help them distinguish between the returns they desire and the returns they require to reach their goals.
Helping clients appreciate that difference can prove beneficial for you as well. A required-return allocation lets you employ strategies that reduce the need for excessive allocations to risky investments and the pressure to kick investment goals. For many clients, sticking with a more conservative allocation tied to their required return lowers portfolio volatility and gives them the confidence to remain invested for the long term.
The key to differentiating your practice in this landscape may be positioning yourself at the centre of clients' financial lives, taking the time to gain a 360° view of their financial relationships and serving as a hub for an array of value-added services.
Here are tips for putting this philosophy into practice:
Research shows that high-net-worth clients end their adviser relationships for a multitude of reasons.
Strikingly, beyond a client's death, most reasons are factors that you can directly influence through proactive relationship management. The most effective services you provide may draw on your people skills, not your investment skills. And even when the end of an advisory relationship is the death of a client, consider this: What actions have you taken to ensure that your client's heirs will continue to turn to you for advice?
No one enjoys hearing a sales pitch. Research suggests that the most successful, enduring practices tend to be built on specific, genuine connections, setting expectations that reflect clients' personal goals, not performance relative to the market. Advisers who play the role of counsellor, confidant and even detective may gain the opportunity to differentiate their practices. By listening closely for cues, you can help match clients with the appropriate services.
Estate planning can be vital to developing enduring relationships with your clients, their partners and the next generation.
Whether you offer specialised services through in-house consultants or provide referrals, use estate planning to learn more about your clients. Beyond the opportunity to help clients plan for the future and proactively address tax liability, you may gain the chance to make inroads with clients' families and build bonds of trust.
Research shows that 67% of couples want to make financial decisions jointly.* So, ask clients if they're comfortable that spouses or heirs could handle their estates. Offer to meet with family members. Providing financial literacy and investment guidance to heirs can reassure your clients and build stronger connections.
You know that your clients are more complicated than their investments. Your relationship-building efforts need to reflect this real-world complexity.
While understanding investment goals is important, don't hesitate to ask clients about other concerns and pressures that inform their lives. You may not have an investment-related solution to offer. Yet you may find that your investment of time and attention will pay off in deeper, more cohesive relationships and referrals.
*Age Wave and LPL Financial, 2011. "A new era of women and financial planning: How advisors can best meet their needs."
The more risk an investor is willing to assume, the higher the expected return. The theory is simple enough. The challenge, though, is building a portfolio with an asset allocation that will provide the returns your client requires to meet long-term financial goals, while persuading them to stick to the allocation through up and down markets.
Once the risk and return trade-off is established, it's time to help your client determine an asset allocation that offers the greatest potential return for which his or her risk tolerance allows. Selecting a suitable asset allocation can help minimise the danger of the client's abandoning their allocation in difficult markets.
While asset allocation is the principal driver of long-term success, tax efficiency of the portfolio can also have a profound impact on returns. The key is to maximise after-tax wealth, not just minimise taxes.
Strategies for improving after tax-returns:
As a financial adviser, your expertise is an important part of the value you bring to your client relationships. Just as important, though, is your ability to provide the objective advice and guidance that clients need to stay on track.
As the voice of reason, your job is threefold:
Investors who flee the markets during times of stress miss both the lows and the highs. You have the unique opportunity to act as an emotional circuit breaker during bull and bear markets, circumventing clients' tendencies to chase returns or run for cover. By recognising and addressing clients' emotional needs, you can steer them through turbulent periods, preventing short-term stress from getting in the way of reaching their long-term goals.
According to Vanguard research, behaviours that can lead investors astray recede when advisers communicate with and educate clients. Your clients need to fully understand each step in the investment process, from setting goals and time frames to choosing and rebalancing assets to addressing tax implications and drawing income. This knowledge may provide a counterbalance to clients' emotions during times of stress.
The financial plan you design and agree on with clients should be central to every conversation. It should reflect not only long-term goals but also your in-depth exploration of risk scenarios. A collaborative plan can serve as an important emotional anchor when clients feel panicked or are hungry for gains. Reminding clients that their asset allocation was the result of careful consideration may help them regain perspective.
Your job doesn't end when you make investment recommendations. The success of your efforts may depend on getting clients to stick to these recommendations. Don't discount emotional reactions; rather, use them as another avenue for communication. If you focus solely on reason, clients will feel you're being indifferent. Try to acknowledge their emotions and then explain the reasons for your recommendations. Compromise rather than an all-or-nothing approach can help clients feel comfortable on an emotional level while remaining on track to reach their long-term objectives.
With this behavioural technique, your goal is to refocus clients' attention on the performance of their entire portfolios, beyond an individual investment or asset class. Coach your clients to evaluate progress toward long-term goals rather than concentrate on recent returns. When a particular asset is underperforming, it's important to show how other parts of the portfolio are contributing. As you know, short-term volatility and negative returns can overshadow a positive long-term trend. By showing clients the big picture, you can help them work through moments of emotional crisis and stay committed to their broader financial strategy.
Integrating behavioural coaching may require an adjustment to your usual day-to-day business processes—as well as a bit of practice. Yet the benefits run deep: You can help clients develop and practise willpower, see the big picture and attain the outcomes they desire. Their resulting satisfaction can produce significant dividends for your business in the form of loyalty and referrals. Advisers who adopt coaching techniques reap rewards not only through these deeper, 'stickier' client relationships but also by offering stronger, differentiated practices in today's challenging marketplace.