Where Advisors Can Add Value for Clients

Christine Benz: Hi, I’m Christine Benz for Morningstar. Morningstar calls it gamma; Vanguard calls it Advisor’s Alpha. Both metrics attempt to depict how and where advisors can add value to their clients’ plans. Joining me to discuss what Vanguard’s research says about where advisors can add value is Fran Kinniry. He’s the Global Head of Portfolio Construction in Vanguard’s Investment Strategy Group.

Fran, thank you so much for being here.

Fran Kinniry: Thanks so much, Christine.

Benz: Let's talk about Advisor's Alpha. The takeaway is that there are all these other areas apart from specific changes to the investment portfolio where an advisor can help add value for their clients. Let's talk about some of the key ones.

Kinniry: Yeah, sure. My team and I developed Advisor's Alpha over 15 years ago, and we were kind of the pioneer in the space. At the time, the primary value proposition, if you will, around advice was mostly on investment management. And if you think about what does that word mean? It's really, you know, I'm going to know what funds to buy or build a separately managed account on what stocks to buy and know how to get you in and out, tactically adjust the portfolio in and out, or sector rotation. The problem with that value proposition is, it didn't come to fruition. Most of the value proposition around doing investment management had a negative alpha, if you will. They underperformed a balanced portfolio that stayed the course. So, what we created is a multifaceted alpha situation where the advisor can add value and they're much more controllable. And that's around making sure that you're selecting low-cost funds, making sure you're doing asset location correctly.

Benz: So, asset location means, in contrast with asset allocation, talk about what that is.

Kinniry: Yeah. So, asset allocation is how much in high risk and low risk? So think 60-40 stock-bond or 70-30. Then the decision is, well, where do I put those assets between my taxable account and my tax-deferred account? So, it's a tax strategy where you can really add or detract a lot of value from the portfolio by thinking thoughtfully about where to put those assets. The other is, we're starting to see a lot of investors enter the decumulation, retirement income. And so, how do I generate income from a portfolio in the most tax-efficient way? And then, another one is behavioral coaching. And that is, you know, your firm has done a great job on Mind the Gap; we do our own. And we see that investors on their own behavior tend to destroy 1% or 2%. And let's be fair, some of the advisors do, too. It's not whether you're a do-it-yourself investor or an advisor. It's following an asset allocation and rebalancing to it instead of chasing fads or chasing returns that tends to destroy that value.

Benz: Okay. So, I want to think about this through the lens of an investor or sort of an individual person managing their finances. How do they think about selecting the right advisor based on this? It seems like if the advisor is telling me, "Okay, my strategy is to market time among sectors," that's a red flag. Instead, I want an advisor who's talking about some of these other factors?

Kinniry: Yeah, I think what has happened in the advice space is, we've started to see a more professionalization in advice, meaning that, you know, now--it used to be that advice, you needed to have $0.5 million or $1 million to find a really reputable advisor, who was going to do fee-based, and then do all the things that we believe that can add value, and that have shown through time can add value. Those are the areas we just mentioned around wealth planning, financial planning, behavioral coaching.

Now, actually, with the advent of technology, the ability to have advice for a client at a very low level of assets, you know, in the thousands of dollars in a very professional way is there and the things you would want to look at is, what is their value proposition? If they're talking about outperforming the market by knowing what stocks to buy, or what funds to buy, or when to buy, those could be some red flags as you mentioned. Those have proven to be really difficult to do. But if they're talking about helping you save for retirement, help you save for college planning, thinking about how to develop an asset allocation. And then, the behavioral coaching is, When the markets are very volatile, do they help you stay confident in your asset allocation that you don't sell out near the bottom of the market?

Benz: Okay. Interesting research, Fran. Thank you so much. It's great to get your perspective.

Kinniry: Thank you so much, Christine.

Benz: Thanks for watching. I’m Christine Benz for Morningstar.