How to add 3% in net returns

Financial advisors can add about 3% in net returns for their clients if they use a wealth management framework that focuses on portfolio construction, behavioural coaching, asset location and other relationship-oriented services, finds research by Vanguard Investments Canada Inc.

Read: Responsible investing can offer better returns: study

“Partly the result of the Client Relationship Model reforms being implemented in Canada, greater fee transparency will make it even more important for advisors to successfully communicate their value,” says Atul Tiwari, managing director of Vanguard Investments Canada Inc.

Read: Older Canadians share financial lessons

Calculating how much an advisor can add in net returns is based largely on the researchers’ approach to five wealth management principles. While the exact amount may vary depending on client circumstances and implementation, according to the study, here’s how an advisor can add value.

• Be an effective behavioural coach. Helping clients maintain a long-term perspective and a disciplined approach is one of the most important elements of financial advice. (Potential value add: 1.50%.)
• Apply an asset location strategy. The allocation of assets between taxable and tax-advantaged accounts is one tool an advisor can employ that can add value each year. (Potential value add: from 0% to 0.42%.)
• Employ cost-effective investments. This critical component of every advisor is based on simple math: Gross return less costs equals net return. (Potential value add: 1.31%.)
• Maintain the proper allocation through rebalancing. Over time, as its investments produce various returns, a portfolio will likely drift from its target allocation. An advisor can add value by ensuring the portfolio’s risk/return characteristics stay consistent with a client’s preferences. (Potential value add: 0.47%.)
• Implement a spending strategy. As the retiree population grows, an advisor can help clients make important decisions about how to spend from their portfolios. (Potential value add: 0% to 0.41%.)

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.