Start the Advisor's Alpha Conversation How To

How to Start the advisor’s alpha conversation

Vanguard Shifting from a performance-based advisory framework to one focused on A d v i s o r ’s wealth management and behavioral coaching can be challenging for both Alpha® you and your clients. This brief “How to” guide describes some important themes that will help you build a more convincing case for your transition to a successful advisor’s alpha model.

Control what you can While there are often places within a given portfolio to pursue outperformance, the essence of the advisor’s alpha concept is that a client relationship based on consistent market outperformance is unrealistic. You’ve been successful when you’ve convinced your clients that the smartest way to invest is to control costs, be broadly diversified, and have a good plan and stick with it.

Redefine your value proposition through a holistic approach

Traditional value proposition Advisor’s alpha model

Emphasis: Outperformance Emphasis: Holistic nancial planning Tools: Security selection Tactical shifts Tools: Portfolio construction Manager selection Holistic nancial planning Behavior coaching Investment performance Wealth management

For institutional and sophisticated investors only. Not for public distribution. Establish and Gather de ne client/advisor client data 1relationship 2 and set goals The chart at the top of the next page illustrates how investors are capable of behaving. You deliver enormous value by helping your clients avoid The Evaluate decisions that run counter to their best interests Monitor nancial client or cause them to stray from their plans. the plan plan 3 nancial 6 status Determine whether your clients’ investment returns are required or desired Help client Develop implement recommendations The financial planning process should result in an 5 the plan 4 and alternatives estimate of the returns your clients require in order to achieve their investment objectives.

An area where your coaching skills are critical is helping your clients appreciate the nature of risk and return as you help them distinguish between Create a financial plan and the investment returns they desire and the returns encourage clients to stick with it they require to achieve their short- and long-term goals. A carefully conceived financial plan is a must-have for every client. It contains a wealth of information, For many clients, sticking with a more conservative including short- and long-term objectives, risk allocation tied to their required return lowers portfolio preference, and anticipated savings rate. It’s the volatility and gives them the confidence to remain blueprint that spells out the details of your client’s invested for the long term. short- and long-term financial well-being, including the investment-return rate the client requires to Helping your clients appreciate the difference achieve his or her goals. between required and desired returns can prove beneficial for you, as well. A required-return The financial plan forces a commitment to discipline allocation lets you employ strategies that reduce the through up and down markets. From a behavioral need for excessive allocations to risky investments finance standpoint, a financial plan allows you to and the pressure to hit investment home runs. provide meaningful counsel that can reduce client anxiety, confirm progress, and keep clients on track.

For institutional and sophisticated investors only. Not for public distribution. Investors tend to enter and leave the market at the wrong times

Rolling 12-month excess returns, total world stock market versus U.S. broad bond market, 1990–2017

60%

World stocks 40 outperform U.S. bonds

–20

–40 U.S. bonds outperform world stocks –60 1990 1999 2000 2001 2002 2006 2007 2008 2012 2017

Cash ow: Equities $162B $81B $393B –$58B Cash ow: Bonds –7B 83B 194B 1,266B

$258B $50B –51B 132B

Sources: Vanguard, based on data from MSCI and Bloomberg Barclays. Notes: Excess return is the difference between the returns of broadly diversi ed world stocks and U.S. bonds. World stocks consist of the MSCI All Country World Index and U.S. bonds consist of the Bloomberg Barclays U.S. Aggregate Bond Index. Data as of December 31 for each year. Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Start the discussion Helping your clients understand the importance of the principles outlined here is a good way to start the advisor’s alpha conversation. For more ways to incorporate the Vanguard Advisor’s Alpha concept in your practice, contact your Vanguard sales executive at 800-997-2798.

For institutional and sophisticated investors only. Not for public distribution. Annual benchmark returns

40 199 1994 199 199 1997 1998 1999 2000 2001 2002 200

40 2004 200 200 2007 2008 2009 2010 2011 2012 201 2014 201 201 2017

Dow ones U.S. Total Stock arket Float Adjusted Index Bloomberg Barclays U.S. Aggregate Bond Index SCI US Broad arket Index

Sources: Dow Jones, Bloomberg Barclays, and MSCI. Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. All investments are subject to risk, including possible loss of principal.

Start with a plan Use the corresponding Client note, Start with a plan, Client note

A carefully conceived financial plan is a must-have The chart below illustrates a common pitfall of investor for every investor. It contains a wealth of information, behavior. The chart shows that, historically, investors including your short- and long-term objectives, risk have bought stocks when the market was at or near its aversion, and anticipated savings rate. It’s the blueprint peak and sold them when the market was declining, a that spells out the details of your short- and long-term classic illustration of chasing returns. Sticking with your to help in your conversations with clients. financial well-being. financial plan can help you avoid decisions that run counter to your best interests. A financial plan can also help you stay disciplined through up and down markets. It can help reduce your anxiety during tough market conditions, confirm your progress, and help you stay on track.

Cash flows tend to follow performance

Rolling 12-month excess returns, total world stock market versus U.S. broad bond market, 1990–2017

60%

World stocks 40 outperform U.S. bonds

–20

–40 U.S. bonds outperform world stocks –60 1990 1999 2000 2001 2002 2006 2007 2008 2012 2017

Cash ow: Equities $162B $81B $393B –$58B Cash ow: Bonds –7B 83B 194B 1,266B

$258B $50B –51B 132B

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