According to a study by Vanguard, advisors provide “about 3.00%” to client portfolios.¹ The study also found that this value isn’t just coming from investment management or asset allocation strategies, it was coming from the more nuanced services that advisors provide to their clients: behavioral coaching, decumulation planning, tax-efficiency, and cost-effective portfolio implementation.
In this article, we wanted to explore each of these topics in a bit more detail and discuss how our team blends strategy performance with financial planning to support our client’s financial lives.
#1 – Behavioral Coaching (estimated at 1.50% in added performance)
Warren Buffet famously said that investors “should be greedy when others are fearful and fearful when others are greedy.” Today, stock markets are near record highs and inflation is historically low, yet many investors are adding more and more equity positions to their portfolios. This is probably the exact wrong time to be aggressively buying equities, yet we see greed clouding the better judgment of individual and institutional investors.
The solution is to develop a comprehensive financial plan and stick to it. The “sticking to it” part can be the hardest part, and for this reason, the role of a financial advisor is similar to that of a personal trainer: while anyone can go on YouTube and look up exercises, it’s all about having a coach that walks you through the process, keeps you on schedule, and encourages discipline. A financial advisor works the same way, by developing a comprehensive financial plan and then keeping stakeholders on course when fear or greed enters the equation.
#2 – Cost-Effective Implementation (estimated at 0.34% in added performance)
Management fees have decreased dramatically in the last twenty years. This holds true for active and passive strategies. At RVP, we certainly seek out low-cost solutions when building client portfolios, but we fundamentally believe in utilizing funds with the highest relative value.
This means that we will accept higher management fees if and only if we feel the expected returns or exposure warrant the higher fee. Vanguard estimates that this type of cost-effective implementation alone can add 0.34% to portfolio performance.
#3 – Tax Efficiency (estimated at 0.00% to 0.75% in added performance)
Taking a holistic approach to wealth management means that we need to manage a client’s tax structure and asset allocation simultaneously. Where should your money be invested and in what type of entities should you hold this money so it is most efficient from a tax perspective?
The answer to these questions can have major impacts on a client’s wealth trajectory, and it’s why we have an income tax specialist like Jeff Fosselman on our team. With 16 years of experience in tax planning, a master’s degree in tax, and a law degree, he is a key resource for clients when it comes to identifying tax-advantaged strategies and (when needed) guiding entity creation.
#4 – Decumulation Planning (estimated at 0.00% to 1.10% in added performance)
Before you retire, you are in the accumulation phase of life. Once you retire, you begin the decumulation phase, because you may be spending more money than you are bringing in each month.
Our job is to help you decide which accounts to draw from first considering the accounts’ expected returns and tax structures. Vanguard estimates that this type of decumulation planning can add up to 1.10% in performance to a client’s portfolio.
For many, the debate is between passive and active investing. We feel both strategies have their place within a comprehensive wealth management plan. If you are looking for an advisor that blends active strategies, passive strategies, and wealth management, we invite you to connect with our team.
ABOUT THE AUTHOR: DAVID MCGRANAHAN
With more than 28 years of experience in the financial services industry, David came to RVP from Credit Suisse, where he worked in New York, London and Chicago. He most recently served as Managing Director and Head of Wealth Management for the Midwest Region. Prior to overseeing Credit Suisse’s Midwest Private Banking operations, David worked his way through the ranks, filling many roles including Head of Fixed Income and Hedge Fund Initiatives for CS HOLT, Head of U.S. Equity Sales (Europe), Institutional Equity Sales and Fixed Income Research Analyst, when he first started at the firm in 1991.
¹ Vanguard, Quantifying Your Value To Your Clients
Information contained in this article is obtained from a variety of sources which are believed though not guaranteed to be accurate. Past performance does not indicate future performance. This article does not represent a specific investment recommendation.
No client or prospective client should assume that the above information serves as the receipt of, or a substitute for, personalized individual advice from Relative Value Partners, LLC which can only be provided through a formal advisory relationship. Clients of the firm who have specific questions should contact their Relative Value Partners counselor. All other inquiries, including a potential advisory relationship with Relative Value Partners, can be directed here.