Let's talk money.

‘Advisor’s Alpha’is a recently coined term by Vanguard, the $2 Trillion asset management company, which we do use for many of our investments. ‘Alpha’, in financial terms, means ‘outperformance’ or manager skill and it primarily applies to investment performance, but that is not what we’re talking about. What Vanguard has identified, and we totally agree with, is the value that an advisor can add to a client by applying few fundamental principles, and none of them are related to outperforming the ‘market’ or the next advisor that you could be compared to on a short-term basis of past performance. They are related to understanding human nature, learning from past history and having discipline. Let me explain.

We have often been writing on many mistakes investors make by following past performance and investing on hind-sight, thus buying an over-appreciated asset just because it has done well in the past. We can mention the dot com, housing and many more ‘manias’ that people always fall for, but almost always are too late to make any profit. Then, when paper-losses show on their accounts, they panic and sell for a loss, thus closing the classic cycle of buying high and selling low, getting angry and staying out of the market for some time, until the next ‘mania’ comes to them in disguise as ‘this time is different’. But it never really is…

An advisor can fundamentally help on this situation and acting as a 1) behavioral coach can advise into sticking with the plan and not falling for the next ‘hot tip’. This timely advice can make a big difference in both preventing the client from buying high, as well as preventing the client from selling low.

The next part that an advisor can help is by 2) building efficient portfolios, where client’s risk tolerance is taken in consideration and with diversification in mind, the lowest cost products that provide the needed exposure are selected. This part can be very costly to many clients who may not be aware of the costs/fees of the funds they currently use.

The third important part is using 3) tax-efficient strategies to maximize total after-tax returns, not just before tax returns. What’s important to a client is what’s left for him/her, not what’s there before the government takes its cut. As such, an advisor can make use of tax advantageous accounts first, such as Traditional or Roth IRAs before getting into the taxable accounts arena. Even there they can use known strategies such as loss-harvesting (selling losers to offset gains) to lower overall tax bills.

The last, but also very important ‘best practice’ is to use4) rebalancing in a disciplined fashion. Rebalancing is bringing back the weights of your investments to their original and intended weights. This practice helps in reaping gains on the profitable investments, while buying low on investments that haven’t done so well, but have propensity to improve over the long run.

As a conclusion, these four ‘best practices’ that Vanguard has researched will differentiate the advisor of the future and show how an advisor can help you reach your personal goals and not just try to beat the market quarter after quarter… After all, we know that over the long run most active advisors under-perform the indexes they are trying to beat, and themselves fall into the same predicaments as the clients they are trying to advise.

Recapped below, Vanguard believes that these four ‘best practices’ have added at least 3% per year over long investing periods to their clients’ performance.
We believe that the advisor of the future can and will add value through these means and be more of a coach and a comprehensive planner rather than a ‘I can beat the market’ kind of advisor.

From Vanguard Research:

Among the best practices followed by the most successful advisors:

1) Being a behavioral coach who helps clients to get on the right path and prevents them from taking wrong turns.

2) Being tax-efficient through prudent asset location and tax-smart spending strategies.

3) Keeping investment costs low.

4) Rebalancing in a disciplined fashion.”


Lead Advisor, InvestEd.

Loading Conversation