When it comes judging an investment manager, it’s not just a question of just looking at their returns. As the saying goes, all boats are lifted in a rising tide.  The world of investment therefore uses the term Alpha to describe what has been achieved above the market.

Vanguard, the World’s largest investment firm with over four trillion pounds under management work with both do-it-yourself investors and advice firms. They can see differences in return between these groups of people, even those using the same funds! Over the last 18 years, they have researched and measured the Alpha that can be added with professional financial planning. The gap is startling, a typical difference of 3% achieved each year.

Vanguard have identified seven key areas that contribute to what advice adds. 

(I.) Asset allocation. The overwhelming factor in determining investment performance.

Alongside diversification, this provides the powerful tools advisers can use to help their clients achieve their financial goals. They should form part of an investment policy statement to provide a road map through investment cycles. 

(II.) Rebalancing. Keeping a portfolio’s risk and return profile on course.

Rebalancing to maintain a portfolios asset distribution helps to reduce risk. It can also add to the overall return. Selling assets when they are over represented is biased towards selling them at higher prices; purchasing underweight asset classes is biased to purchasing them at lower prices. The service Aspen Wealth Management can offer provides an additional and proven rebalancing algorithm that has further reduced the risk and added value.

(III.) Costs.

Controlling costs doesn’t just mean comparing the management fees. A good adviser will also consider the hidden costs that goes beyond this.  Portfolios can add or reduce cost according to how they trade. 

(IV.) Behavioural coaching. 

Behavioural coaching is possibly the largest potential value-add tool. Helping clients maintain a long-term perspective through different market cycles and discouraging market timing and performance chasing behaviours can save clients from potential wealth destruction. Typically, investors are led by recency bias. Investments flow to and from funds according to their most recent achievements. This approach makes sense in most other areas; there is a high chance that someone winning a marathon three years in a row will be in the top ten the following year. With investments, despite some exceptions and the way in which they are promoted, this is usually counterproductive. 

(V.) Tax allowances & (VI.) Spending strategy. 

Individuals aim to accumulate assets and then spend them when they stop working. There is a massive difference that can be made in the way that tax planning and spending strategies are used.

(VII.) Total return versus income.

Many investors are under the misconception that an income only approach strategy will provide a higher certainty of income and less risk. Relying on an ‘income-only’ approach is often harmful. The bottom line is always made up of what happens with the capital and income not one or the other.

August 2019 by David Cockling