Adviser's Alpha refers to the added value that is demonstrated by a financial adviser's ability to effectively act as a wealth manager, financial planner and behavioural coach, rather than by overconcentration on investment selection.
Vanguard coined the term Adviser’s Alpha in the US following an original research paper written by Fran Kinirry in 2013. This is a framework where the real value of financial advice can be understood to be more than simply pointing to a portfolio return number versus market benchmarks.
Recognise what helps clients most
Demonstrating value for advisers has become increasingly important as the compensation structure in Australia has evolved from a transaction-based system to a fee-based, asset management framework. However, providing a well-considered investment strategy and asset allocation is as important as an adviser's investment acumen and ability to deliver better returns than the markets.
Rather than investment capabilities, the Adviser's Alpha model relies on the experience and stewardship that the adviser can provide. The model focuses on asset allocation, rebalancing, tax efficient investment strategies, cash flow management and, when appropriate, coaching clients to change nothing at all, rather than relying on market outperformance.
Historically, many advisers have sought to add value through active strategies such as tactical asset allocation, fund selection and rotation and securities selection, despite the mounting evidence suggesting that these efforts will help neither their clients nor themselves in the long run.
Guidance in controlling emotions
On their own, investors tend to chase performance. Twenty years of data illustrates how investors can pour money into the stock market after a run-up, only to sell their holdings when a downturn is well under way. Prudent financial advisers use a top-down investment approach by establishing asset and sub-asset allocations in line with their clients' goals and then periodically rebalancing those allocations. They also eliminate the emotional element, which many individual investors can't overcome.
In times of market shocks an adviser’s experience and stewardship can be particularly valuable to clients because if left alone, investors can make choices that impair their returns and put at risk their ability to achieve their long-term objectives.
In that sense, the Adviser's Alpha framework suggests a better measure of an adviser’s value is to judge it against what an investor would likely do without professional advice.
Recently, an updated version of the research paper for the Australian market has been released and is available here, and on vanguard.com.au/advisersalpha
Robin Bowerman is Head of Market Strategy and Communications at Vanguard Australia, a sponsor of Cuffelinks. This article is general in nature and readers should seek their own professional advice before making any financial decisions.