Vanguard recently published a paper suggesting a good financial advisor can add up to 3.0% of additional rates of return, net per year, to a client’s account. That’s 3.0% more than what someone might do on their own.
This is Vanguard…. The company that built its empire on low cost mutual fund investing, suggesting that it’s not all about low cost mutual funds.
This is huge! Finally, the industry understands driving fees as low as possible isn’t the only thing that matters. Actual advice matters. Expertise matters. Personalization matters.
Since I think it’s safe to assume many of you have zero interest (or time for that matter) to read the twenty-eight page article released by Vanguard, but have some interest in how you can get your hands on the additional value, I thought I would summarize it for you.
In short, Vanguard suggests seven strategies a good financial advisor can implement to add value. Here is a list of those seven.
Value Add 1 – Setting Asset Allocation
Investing starts by determining your asset allocation (read more here). Asset allocation is set by a number of factors including but not limited to risk tolerance, time horizon, and financial well-being.
Value Add 2 – Cost Effective Implementation
Does a bottle of red wine that cost $200 taste better than a bottle that costs $20? Or, would you rather buy the cheap one and pocket $180?
When picking investments, it often makes sense to pick the $20 bottle. Driving down the cost of your investments is one strategy that immediately adds value to your portfolio. With 10,000+ mutual funds, ETF’s, and other investment products available, you have a variety of options from which you may choose. Finding low cost investments is probably a good place to start.
Value Add 3 – Rebalancing
Do you rotate the tires on your car? I bet you do. Do you know why? You want to balance the wear on the treads so the car stays in balance.
Stocks, bonds, and cash need to stay in balance too. They all grow at different rates of return, and over time they wear in different ways. At some point, you need to rotate the allocations and bring them back into balance.
For example, lets assume your portfolio is designed to be 60% stocks and 40% bonds. Over time, this allocation will change as your investments grow/decrease in value. Fast forward a year or two, and it could be 70% stocks and 30% bonds.
Having a plan in place to “rebalance” your portfolio back to 60% stocks and 40% bonds should increase your rate of return and decrease your risk.
Value Add 4 – Behavioral Coaching
Remember that time in college when you wanted to text your ex-boyfriend or girlfriend and your best friend took your phone away. Best move ever. Thank god for them!
Well that’s me. I’m your best friend. I’m here to help protect you from your bad ideas.
Getting emotional with your investing is one of the biggest problems I see investors make. Getting greedy because the market is up, being overly paranoid when its down, believing too much in your own company stock, or holding an investment too long because “its done good in the past” are some common investing mistakes.
None of these feelings have anything to do with a sound investment strategy. A big part of my job is helping clients understand these emotions and encouraging them not to make a bad decision.
Value Add 5 – Asset Location
Your investments may be taxed differently. For example, money in your 401k and IRA will likely be taxed at ordinary income rates (less favorable).
Money invested in non IRA accounts may be eligible for long term capital gains rates (more favorable).
A good investment plans for taxes. Tax efficient investments should be allocated to tax efficient accounts, and less tax efficient investments should be in tax deferred accounts.
Value Add 6 -Withdrawal Order For Spending
You’ve saved all this money so one day you can spend it right!
Deciding which account to take the money from matters. If you withdrawal from an IRA or 401k, the money will be taxed as ordinary income. If you withdrawal from a personal investment account, it may not be taxed at all.
You should consider other income and other factors now and in the future when deciding which account from which to withdrawal your funds.
Value Add 7 – Total Return vs. Income Investing
Interest rates are low, and no one knows when they are going to go up. This means you are likely receiving little to no yield on your bond and cash investments.
If you are receiving higher yield, it may be because you are chasing yield. Keep this in mind; if something is paying you a higher yield, it is likely a riskier investment. Nothing is free in this world.
You should know both yield AND capital appreciation matter. If you buy something for $100 and sell it for $150, are you still happy? That growth is referred to as capital appreciation. Who cares if it never paid you “yield;” you still made money!
By balancing your investments to incorporate both investments with yield and investments that focus on capital appreciation, you are potentially adding value to your portfolio.
Asset allocation does not guarantee a profit or protect against loss.
None of the information in this document should be considered tax or legal advice. You should consult your legal or tax advisor for information concerning your individual situation.
Image courtesy of Stuart Miles at FreeDigitalPhotos.net