Vanguard Group has learned that financial advisors can take four steps to potentially add at least 300 basis points annually of performance for their clients over the average advisor, said Vanguard chief informatin officer Tim Buckley, who spoke today at the Inside ETFs conference in Hollywood, Fla.
Vanguard looked at the best practices of advisors and compared them to the average advisor to come up with its conclusions, Buckley told the standing-room only group of attendees.
"First, be a great behavioral coach. Get people to resist that first pressure of chasing performance," he said. "Get people to stick to their asset allocations, get them to continue to put money into the market, not chase the market." That can be worth 150 basis points a year in performance, Buckley added.
The next part, and it's not the sexiest part, Buckley acknowledged, is to be tax savvy. "Think about asset location," Buckley said. "If you have taxable bond funds in a portfolio, are they sitting in a tax-deferred account? They're very inefficient. Are those low-cost, low-turnover, low-capital-gains ETFs sitting in taxable accounts? Have you thought through drawdown for your clients?" Advisors could get another 100 to 140 basis points of outperformance over the competition by considering the tax implications of investments and where they are placed in client accounts, he said.
The third step is to keep costs low. "Whether you are following a broad market strategy or going after factors, there's no reason why you should be doing it with high expense ratios. Keep those expenses down; it's worth 50 basis points a year on average," he said. ("Smart beta" ETFs may build portfolios around specific factors -- such as high dividends or high return on equity -- rather than using market-cap-weighted indexes.)
The final piece for advisors? Rebalancing. "We looked at the data," Bcukley said. "It's really tough to sell those winners. It's really tough to sell on euphoria and buy on fear. So few people do it, whether they are direct investors or advisors. But if you do it, it's worth another 40 basis points a year."
On the low side, Buckley said Vanguard believes advisors can add about 300 basis points of differentiation over their competitors. Vanguard will be releasing a paper in about a month on the topic, he noted, and will invite questions from advisors.
"That's the alpha we truly believe you can control," Buckley said. "There's no product panacea out there. There's just the value that you deliver for your clients."