From portfolios to people: The evolution of Vanguard Adviser's Alpha

31 July 2018 | Practice Management


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By Donald G. Bennyhoff, Vanguard senior investment strategist

The path to client satisfaction and asset growth should follow an underappreciated route – relationship management. Financial advisers who develop deeper relationships are rewarded with referrals and client loyalty.

In an era of stricter regulations, technological innovations and downward pressure on fees, you need to enhance your value – your adviser's alpha – by differentiating yourself from your competitors, both robo and human. Recent Vanguard research explains the importance of relationship building and behavioural coaching.

Clients determine your value

In the wake of the 2008 global financial crisis, investors are more interested in knowing whose interests their adviser is working for, as well as how their adviser is paid for services. This 'great awakening' of investors may be one of the most important and disruptive factors affecting the value proposition for advisers.

Ultimately, it's the client who determines the value of the advice you (and your competitors) can provide. Vanguard's research underscores the need to be sensitive to clients' preferences if you wish to establish a profitable practice and build long-lasting relationships.

By applying your investment knowledge and experience to relationship-oriented efforts such as behavioural coaching, you can improve the probability of satisfying clients. We believe reallocating time from portfolio construction-related tasks to relationship management can be wise. Indeed, in a survey of nearly 4,000 advised investors in the United States, we found that clients who switched from one adviser to a new one cited personality or service factors far more than portfolio performance as reasons for doing so.

Reasons for switching advisers

Personality/service: 65%Performance/portfolio: 39%
  • Adviser neglected our relationship
  • Adviser not proactive with recommendations/opportunities
  • Sensed adviser had ulterior motive (e.g. pushing certain stocks)
  • Adviser transferred me to another member of their team
  • Poor investments that caused me to lose money
  • Poor response to market downturn
  • Underperforming a key index (e.g. FTSE)
  • Returns lower than my peers'

Source: Vanguard. Note: These lists are not all-inclusive. Percentages do not total 100 as respondents could choose more than one factor.

Making better use of your time

Today's clients are asking for more of their advisers' time, not less. You must judge for yourself the best use of your time, but the rewards from allocating more time to client relationships may be unsurpassed by other efforts.

So, how to free up more time for clients?

Advisers can use technology-enabled efficiencies to streamline client onboarding, portfolio construction, and ongoing management; form advisory teams to capitalise on the diverse skills and increased capacity to serve clients well; and use every contact with clients as an opportunity to make them feel valued, respected and cared for.

Much of the typical adviser's time is spent on efforts that might be handled more effectively. For example, a survey by research firm Cerulli Associates found that fully one-fifth of advisers' time is spent on administrative tasks. Similarly, while advisers can't divest themselves of all investment management responsibilities, they may have good alternatives to building and maintaining portfolios security by security. Technology may be useful here, but a simpler answer may be a change in investment philosophy. Managed solutions such as ETF model portfolios and separately managed accounts warrant consideration.

No substitute for a good coach

It's easy to view technology as a threat to the advice profession, but it doesn't have to be. We do not believe technology will soon be building deep, trusting relationships. Nor do we believe human advisers and behavioural coaching will be made obsolete by technology.

For example, advisers can guide clients to improve investment outcomes by helping them better understand an all-too-common reality: "failure" results more often from not keeping pace with returns from asset class beta than not successfully capturing alpha. The paradox of skill and zero-sum game illustrate how difficult it is to successfully deliver excess returns, meaning that a value proposition based on outperformance has a reasonably high probability of disappointing clients. By applying your knowledge and experience, you improve the probability of satisfying clients.

Don BennyhoffDon Bennyhoff
Senior investment analyst,
Vanguard Investment Strategy Group

Learn more – and take action

Vanguard has conducted a landmark adviser-client survey in the UK, made up of both live and online interviews with 300 advisers and 1,000 advised clients. Preliminary results show that advisers and clients see things differently. The first full reveal will be at our 2018 Adviser Symposiums in Leeds (16 October) and London (17 October).


The Advantage of Advice

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Investment risk information:

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Past performance is not a reliable indicator of future results.

Other important information:

This document is directed at professional investors and should not be distributed to, or relied upon by, retail investors.

This document is designed for use by, and is directed only at persons resident in the UK

The material contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.

The information in this article does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this article when making any investment decisions.

The opinions expressed in this article are those of individual authors and may not be representative of Vanguard Asset Management, Limited.

Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority.


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