By Neil Cowell, head of Retail Sales, Vanguard Asset Management
It is an easy temptation for investment professionals to measure the success of their support for clients exclusively in terms of performance. It boils down to a simple set of numbers that can be explained in ways that seem to make sense.
It is also, in our view, wrong. Investment success does have a performance element, of course, but it should be measured relative to meeting an investor’s goals rather than against market benchmarks. Those goals are set in the future, while in the short-term the market can be a noisy, distracting, sometimes frightening place. It is not always obvious that a portfolio is on track or that opportunity is being fully captured.
As investment professionals, we know from hard experience that good advice is often most valuable at the most hazardous moments. But rather than telling clients that advice is valuable, how can we show it? And better still, how can we show it in quantitative terms?
Vanguard has researched that question over several years, drawing on extensive experience in the US, Canada and Australia as well as in the UK. The focus has been on breaking down financial advice into core components and then as far as possible identifying clear, quantitative values for each component.
Overall, the research shows that the value of investment advice, which we have called Adviser’s Alpha[i], averages out at roughly 3% a year. It is a significant sum when compounded over a longer-term investment horizon.