What is the Value of an Advisor?

Vanguard recently published an enlightening White Paper called Advisor Alpha.  This 28 page report, coming from an organization that was built primarily on indexing and a “do it yourself” approach to investing, was especially encouraging.  They seek to quantify the value-add components that a knowledgeable investment advisor can bring to a client’s portfolio.

Our objective at Legacy Wealth is to achieve better net performance results than the appropriate blended benchmark with lower overall volatility through a tactical asset allocation and manager selection. As we continue to aim to meet this objective for our clients, this study may be of interest as it pertains to other key components of wealth management that can, and have, provided additional returns for our clients.

This analysis outlines multiple ways an advisor can add value to a client’s net return by as much as 3% or more annually:

I. Building a Proper Asset Allocation Model (>0 Basis Points)

Properly mixing asset classes for best risk adjusted returns

Matching actual income needs and timeframe to proper allocation using Monte Carlo analyses.

II. Cost Effective Implementation (45 Basis Points)

Using separate account managers with individual securities as opposed to mutual funds helps to mitigate overall cost of management while still accessing superior managers and increasing the sophistication of management approach.

III. Rebalancing (35 Basis Points)

IV. Allocating IRA and Non-IRA Holdings Properly for Ultimate Tax Efficiency (0-75 Basis Points)

V. Implementing an Appropriate Spending Strategy (70-80 Basis Points)

Making tax-wise distributions and timing of IRA versus non-IRA holdings, as well as pensions, social security, and Roth IRA distributions for maximum efficiency.

VI. Total Return Investing Versus Income Investing (>0 Basis Points)

Avoiding the over-focus on dividend yields that can tend toward tax inefficiency.

Avoiding concentration risk and potential lack of diversification, which can actually increase overall risk and reduce net long-term performance.

Avoiding over exposure to fixed income or bond holdings, which can reduce net total return over time in a low interest rate environment.

VII. Behavioral Coaching (100-200 Basis Points)

Vanguard cited that the average investor performance is 1.5% below actual fund performance when an exchange occurs on a client’s fund.

Another study from J.P. Morgan cites that the S&P 500 averaged a 9.9% return from 1995-2014, with a 60/40 model averaging 8.7% over the same period, the average investor return was 2.5%.

Although the seven factors outlined by the Vanguard study build a strong case, we believe that the additional value-add components in working with Legacy Wealth may include the following as well:

Tax-loss harvesting

Charitable giving through lowest basis shares of appreciated securities

Manager selection and ongoing due diligence

Tactical asset allocation based on market and economic conditions

Ongoing service and communication as the portfolio relates to specific planning objectives


Vanguard, “Putting a value on your value: Quantifying Vanguard Advisor’s Alpha,” March 2014. Francis M. Kinniry Jr., CFA, Colleen M. Jaconetti, CPA, CFP®, Michael A. DiJoseph, CFA, and Yan Zilbering.

J.P. Morgan Asset Management, (Top) Barclays, FactSet, Standard & Poor’s, (Bottom) Dalbar Inc.
Indexes used are as follows: REITS: NAREIT Equity REIT Index, EAFE: MSCI EAFE, Oil: WTI Index, Bonds: Barclays Capital U.S. Aggregate Index, Homes: median sale price of existing single-family homes, Gold: USD/troy oz, Inflation: CPI. 60/40: A balanced portfolio with 60% invested in S&P500 Index and 40% invested high quality U.S. fixed income, represented by the Barclays U.S. Aggregate Index. The portfolio is rebalanced annually. Average asset allocation investor return is based on an analysis by Dalbar Inc., which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. Returns are annualized (and total return where applicable) and represent the 20-yearperiod ending 12/31/14 to match Dalbar’s most recent analysis. Guide to the Markets – U.S. Data are as of September 30, 2015.


This information has been taken from sources which we believe to be reliable, but cannot guarantee its accuracy. This material is intended for informational purposes only and should not be construed as legal or tax advice. It is not intended to replace the advice of a qualified attorney, tax advisor or plan provider.
Securities and Investment Advisory Services Offered Through M Holdings Securities, Inc. A Registered Broker/Dealer and Investment Advisor, Member FINRA/SIPC. Legacy Wealth, LLC is independently owned and operated.