Wealth Planning Insights

Explore: Wealth Planning Founder’s Perspectives Books

Vanguard recently released an update to their “Advisor’s Alpha®” research study. First published over twenty years ago, this study attempts to quantify the benefits or “alpha” that wealth advisors can add to their client’s net investment outcomes through relationship-oriented services such as planning and discipline rather than simply picking investments to try to outperform the market.

Particularly in focus are fiduciary-driven (clients first) advisors like Tanglewood who follow certain best-practices when implementing their investment management process. The best practices that were identified in the study align closely with Tanglewood’s approach. It serves as an important reminder of how working with an advisor can improve the investor experience.

The Vanguard research determined that advisors can add up to an average of 3% or more annually in net returns as compared to the average investor. This is not to be expected every year and varies due to client situations and market circumstances. It can be very irregular, from non-existent one year to double digits the next – particularly during periods of market decline or euphoria.

This is certainly applicable today as investors and wealth advisors navigate through one of the most unsettling environments since the 2008-2009 financial crisis. When markets are this volatile and uncertainly reigns, investors are most tempted to let emotions guide investment decisions. This often leads to poor outcomes and permanent long-term damage to portfolios.

Vanguard considered the value-add across seven different modules and attempted to quantify the benefit of each module. A summary of each module is below.

It comes as no surprise that behavioral coaching provides the single biggest impact, offering up to an annualized 2% of additional returns. Keeping client fears and emotions in check prevents impulsive actions to abandon their investment strategy or worse yet, go to cash altogether when markets get volatile. It goes the other way too, chasing the latest hot investment or wanting to get more aggressive at all-time highs. Vanguard finds that the biggest detriment to an investor’s return is often not the investment or portfolio itself; it’s the investor's behavior related to that investment when big swings (in either direction) cause anxiety or an impulse to act. We concur with Vanguard.

Any time spent on the sidelines or even temporarily moving into an overly conservative portfolio may curb anxiety in the short run but opens up the risk of permanently missing out on meaningful recoveries.

Case in point, $1,000,000 invested in the S&P 500 for 10 years ending 12/31/2020 is worth $3,669,960. Missing just the 10 best days over that time ends up with $2,015,760, a reduction of 45%!

Not directly considered in the Vanguard study is the value of all the other areas of wealth planning. It does not include capital sufficiency planning that creates a path into the future and the steps to take along the way, or the development and implementation of a well thought out estate plan to provide a legacy for the next generation. The study does not address the value of insurance or education planning...the list goes on and on.

Your Tanglewood Wealth Advisor will leverage their skills and that of the firm for your continued benefit in all these areas.

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