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Chad is the Managing Director of Creveling & Creveling Private Wealth Advisory. His experience in institutional research, corporate advisory, and private wealth advisory has given him a firm grasp of the financial issues and challenges facing his international clients, as well as the... More
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  • Vanguard Study Shows How Advisors Can Add 3% Or More To Your Annual Investment Return 0 comments
    Jun 19, 2014 8:04 PM

    Expat investors often want to know the best way to assess the value of financial and investment advice. Without a clear answer, many fall back on seemingly tangible but misleading and unattainable metrics such as "beating the market" or achieving some arbitrary short-term portfolio return.

    The desire for a single, tangible measure of value is entirely understandable, particularly as many of the benefits of working with a financial advisor are more easily described than quantified. The problem is that focusing on beating the market or other arbitrary and misleading short-term measures does not result in long-term wealth creation. Instead, it encourages a narrow focus and such wealth-destroying behaviors as emotional decision-making and performance chasing. The traditional sales-driven financial service industry, which is based on transactions, product sales, and short-term metrics, further discourages the behaviors that truly create long-term wealth.

    Quantifying the value of a holistic, advisory-based approach to financial and investment advice is challenging. Over the past decade, Vanguard, a global investment management company with approximately $2 trillion in assets, has developed a framework that shows how an advisor can add value by focusing on the long-run drivers of wealth creation.

    Vanguard Study: Potential 3% Advisor Value Add

    In a recent study, "Putting a Value on Your Value: Quantifying Vanguard Advisor's Alpha, "Vanguard found that a coherent, disciplined advisory approach that focused holistically on long-term outcomes had the potential to add up to 3% in additional returns for the average investor.

    The 3% value add was relative to a sales-oriented, transactional approach that attempts to capture short-term pricing movements or the situation where a do-it-yourself investor takes a less-than-disciplined approach to managing their financial affairs.

    Some value-creating strategies such as eliminating excess product fees or reducing portfolio tax add value annually. Others, such as helping clients maintain a disciplined investment strategy in difficult markets, add value intermittently but create significant wealth over time.

    Even More Potential to Add Value in the Expat Markets

    Vanguard's findings are based on a study of U.S. investors. The typical expat in Southeast Asia, however, has a far more complex financial life, including multiple tax regimes, currency issues, higher product fees, less investor protection, and a loosely regulated financial service industry that is heavily focused on product sales.

    Given the greater complexity and scope, we estimate that a holistic, long-term, goal-oriented approach to wealth advisory can add 4% or more to an expat's net return over the long run.

    Where's the Value?

    Some aspects of financial advisory services are easier to quantify than others. As an example, the value of convincing a client not to bail out on their investment plan during a financial downturn is hard to quantify, but perhaps would add the most value over all.

    The chart below outlines Vanguard's estimates for how advisors can create value for clients by adhering to a holistic, client-focused approach to wealth advisory. We've provided our own estimates for the expat offshore markets.

    Source: Vanguard and Creveling & Creveling Estimates

    Asset allocation: Asset allocation and diversification are the most powerful ways an advisor can help a client manage risk and achieve their financial goals. Numerous studies have shown that an investor's asset allocation is the biggest factor in determining long-run portfolio performance and volatility. The Vanguard study found that the value added by the asset allocation was perhaps the most significant, but too unique to quantify for the average investor.

    Behavioral coaching/disciplined approach: Investors often succumb to media-driven, greed-fear decision-making and the corresponding temptations to time the market and chase performance. Yet these are behaviors that have been shown in numerous studies to destroy portfolio value over the long run. Vanguard estimates that helping clients focus on the long term and maintain a disciplined approach to investing throughout all market conditions can add up to 1.5% per year.

    Cost-effective implementation: Vanguard estimated that using lower-cost funds and ETFs to implement an investment strategy had the potential to add up to 0.45% annually. Given the significantly higher product fees in the offshore markets, we estimate the average expat investor can save up to 1.5% or more by using lower-cost funds to implement an investment strategy.

    Tax management: The proper allocation of assets between taxable and tax-advantaged accounts can add up to 0.75% per year. The highest value will accrue to those with assets split relatively evenly between taxable and tax-advantaged accounts and who are in the higher marginal tax brackets. This may not be a value add for some expats, but for Americans or Americans who have a nonresident alien (NRA) spouse, the benefits may even exceed Vanguard's estimated 0.75%.

    Disciplined rebalancing: Vanguard estimates that disciplined rebalancing back to a client's strategic long-run asset allocation can add up to 0.35%. This sounds easy to do, but requires tracking and rebalancing assets across all accounts in the portfolio. In our experience, clients typically don't have the time or software to track and implement this strategy across all the accounts in their investment portfolio on their own.

    Of Great Value, But Harder to Quantify

    The strategies outlined above are some of those that apply to nearly all investors and are the most easily quantified. The Vanguard study also looked at retirement withdrawal strategies and total return vs. income investing. Each had the potential to add significant value, but that value was unique to a specific client.

    Below are some additional ways an advisor focused on a holistic, long-run approach can add value, but which are either difficult to quantify or where the specific value added is unique to a particular client:

    • Maximizing employee benefits
    • Better financial decision-making
    • Goal-oriented financial planning and investing
    • Mitigating risk
    • Client education
    • Peace of mind

    Understand How Your Advisor Adds Value

    Vanguard's work shows that a good advisor with a client-focused approach can add significant value over the traditional sales-oriented or DIY approach. Not all value is easily quantified or accrues annually, but a disciplined approach and a focus on the long-term drivers of value can result in significant wealth creation over time. Don't be fooled by arbitrary or misleading short-term metrics. Make sure you understand how your advisor's approach helps you create and preserve your wealth over the long run.

    Additional Resources
    Seven Things Expats Need to Know About Investing
    Expat Investing: In Retirement, the Sequence of Returns Matters
    Expat Investment Advice: Don't Chase Returns, Diversify Instead
    Low-Cost Investing for Asia's Non-U.S. Expats
    Expat Investing: Three Quick Ways to Boost Investment Returns
    Non-Deductible IRA: A Backdoor Roth for US Expat High Income Earners

    Find more articles by Chad Creveling, CFA, on Google+

    About Creveling & Creveling Private Wealth Advisory

    Creveling & Creveling is a private wealth advisory firm specializing in helping expatriates living in Thailand and throughout Southeast Asia build and preserve their wealth. Through a unique, integrated consulting approach, Creveling & Creveling is dedicated to helping clients cut through the financial intricacies of expat life, make better decisions with their money, and take the steps necessary to provide a more secure future. For more information visit crevelingandcreveling.com.

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