When we discuss our fees with clients, we like to demonstrate how our fee will pay for itself or at least save them a multiple of the fees we charge. I want to share with all of our clients the significant potential value of the Vanguard Advisor's Alpha framework, as highlighted by Vanguard's analysis. This framework can add up to or exceed 3% in net returns. You can review the research and download the whitepaper here.
A recent Vanguard study shows that there are several ways to add value for our clients beyond just low-cost index funds.
For example, we use diversified, tax-efficient investment strategies to save on taxes during investing and withdrawals.
Additionally, we provide coaching on behavioral techniques to help clients stay on track with their investment plans and
rebalance when necessary. A one-million-dollar portfolio could receive $30,000 worth of value using this framework.
The Vanguard study highlights six major components which can derive value for clients:
Throughout this article, we use the term basis points. This is an industry term for describing changes in value or cost; each basis point represents 1/100 of a percentage or 0.01%. For example, in a mortgage or loan, an interest rate increase from 5% to 5.25% would equal an increase of 25 basis points. This Vanguard study breaks down strategies for financial growth using basis points, with each strategy having a number of basis points totaling up to 300. This means in a million-dollar portfolio, these techniques could lead to up to 30 thousand dollars in return.
Asset allocation:
The potential value is very high but is too unique to specify a number. It decides how much of a portfolio to put into different classes, like stocks, bonds, and cash. This allocation depends on the investor's risk tolerance and time
horizon.
Low-cost index funds: You can add 30 basis points annually to your portfolio.
Net return is the gross return after subtracting costs. Average investors typically pay 34-38 basis points yearly for their portfolios, while those in the lowest-cost funds may pay about 7-9 basis points. This is a conservative estimate, as total investment costs can also include sales commissions and additional fees.
Rebalancing: Offers a potential value-add of up to 14 basis points annually.
As investments change in value over time, a portfolio may stray from its intended mix, creating new risks and returns that don’t match your original preferences. The main benefit of rebalancing is that it helps manage risk. Whether the market is doing well or poorly, moving money from the better-performing assets to the worse ones can feel wrong. We can provide the commitment to rebalance, especially when it requires a tough decision. We work to rebalance effectively, which can help you keep more of your returns.
Behavioral coaching: Potential value-add: 100 to 200 basis points.
One of the most significant benefits we offer is helping our clients stay disciplined and focused on their financial strategy. Investing often triggers strong emotions, so it's crucial for us to encourage our clients to keep a long-term viewand stick to their plans. This support can provide significant value. The behavioral gap seen during market downturns, like in 2020, highlights the need for advisors to act as behavioral coaches during times of market stress.
Asset location: Potential value-add: 0 to 60 basis points.
This refers to the breakdown of assets between taxable and tax-advantaged accounts. To minimize the impact of taxes on your investments, it may be best to hold tax-efficient broad-market stocks in taxable accounts and taxable bonds in tax-advantaged accounts. These small differences can lead to significant growth over time.
Withdrawal orders: Potential value-add: up to 120 basis points.
Withdrawal order: This vital strategy can add up to 120 basis points to your portfolio. By using smart withdrawal order strategies, you can lower the total taxes you pay during retirement. This helps you grow your wealth and extend the life of your portfolios. By doing this, you can feel financially secure and better prepared for retirement.
The Vanguard Advisors Alpha research study highlights how financial advisors can greatly improve a person's financial health. By understanding the value advisors bring beyond just investment returns, clients can make smarter choices and appreciate the overall approach to financial planning, leading to better financial health and security.
Individual clients' results can vary. Some may see outcomes on the lower end, while others might achieve results above expectations. Strategies like cutting investment costs or taxes can provide annual benefits. However, the biggest opportunities often arise during times of market stress or excitement.
With almost 20 years of experience in financial markets, one of my key strengths is helping clients stay focused and avoid emotional distractions when making financial decisions. The behavioral coaching aspect of the Vanguard research is especially important for my clients.
These decisions should always be made in the context of your financial plan and personal goals. For this type of sophisticated strategy, working with someone comfortable with options and how to implement them is critical.
These decisions should always be made in the context of your financial plan and personal goals. As a tax-focused financial planning firm, we strategically plan for the tax implications and walk you through our financial planning process. Feel free to contact us at www.CadencePlanningChicago.com or www.CadencePlanningLLC.com to learn more.
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