Adviser's Alpha in Practice - Insights from the US market (Part 1 of 4)

Vanguard | 18 July 2012

In the first excerpt from a Vanguard Group, Inc. webcast, you'll hear about what Adviser's alpha looks like in practice at a US-based wealth manager.


Rebecca:  Do they get stuck sometimes in the past and an experience that had just happened rather than trying to take that longer view and how do you reframe that?

David: You know, we talk always about the future with our clients because we feel like there's nothing we can do to change what already had happened, and we don't happen to own a time machine.  So we're always focused on what their future goals are.  Our clients, many of them don't even want performance reports.  They get so focused on our wealth management report that shows whether they're over-funded or under-funded.  You know, am I on track or do you have a new recommendation for me?  I mean, every time we meet, whether it's a bad market, a good market, or a normal market, we're either giving new advice or reconnecting to their goals and priorities.  So and I really think that whole benchmark thing? I was part of the problem with that, okay, 'cause back in the '80s when I got into investment consulting, we started doing performance reports, and I think it's almost a self-inflicted wound to the industry to start benchmarking client portfolios and saying this number's going to be what my value is, and it doesn't have to be that way and we taught clients to do that.

Rebecca: I mean, well what do you do?  How do you un-teach that?  Is there something that you can show them that will satisfy that need to see themselves versus a benchmark but also help you move towards the ultimate goal of finding that end value?

Fran: I think what David did at his firm, and I didn't know this until just now.  He took performance measurement off and I meet with a lot of advisers.  Part of my role is meeting with advisers every day, and that is a very common – the only – sometimes by putting it right there smack in the middle of their eyes every day, you know, you're training them to keep comparing to that single report card.  So a lot of the higher end advisers have removed the benchmark from the statement and they’re saying these are – basically make it a goals-based, and I'm not sure, David, if you want to expound on how you do that, but you know, almost similar to how a pension fund may talk about are you over-funded or under-funded for some goal in the future.  It sounded that's maybe something what you're doing?

David: That's absolutely what we're doing, and it's not just, you know, one goal.  It's all their goals.  It's, you know, where they stand relative to their ideal dreams, to their acceptable compromises if the markets misbehave, you know, and if you put yourself in the clients' shoes – you know, I talk to a lot of advisers who say well, I do goals-based planning.  Well, how often do you talk about those ideal and acceptable goals?  Well, we try to review it at least once a year, normally every two years.  Well, if they're – your communication with the client, though, is always about performance against a benchmark, the client says well, you may be talking about goals, but we haven't talked about that in the last six meetings, but I have had six performance reports, so that must be what's important is what's going through the client's mind.

Rebecca: Our next question says this is a question of client fit.  So this again, perfect.  What is the best solution for an adviser when you recognize your clients wants a compromise the overall investment approach and the value the adviser is bringing to the table?  So you've talked about firing them.  Is there anything else short of that that can be done?

David: Well, in my case, I've had to let clients go.  I usually give them the benefit of the doubt.  You know, we've – we want our clients to make the most of their lives and if they're – you know, they want their entertainment portfolio as long as we define it as that, they can go do their day trading and they'll have some fun with that.  We won't count that as wealth that we can count on.  You know, but you know, I've had some large clients that, you know, started off with just a portion of their assets with us and you know, slowly moved some more over, but they were always – you know, pretty significant part of it were completely off, and after a couple meetings with them, we'd go through and look at you know, what the impact was on their confidence level, and they weren't following the plan and their confidence level with what they were doing was like half of what we were recommending, and if they aren't willing to change, I think terminating the relationship is the safest thing for you to do.


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