Vanguard’s study – Alpha Advisor

May 8, 2017 | Tony Byrne's View

I continually read books and attend courses on personal finance because my profession is also my hobby. I guess I am one of those lucky people in life who does what he loves which is why it never really feels like work to me.

I have gleaned from these various books and courses some interesting facts. Did you know, studies show that active fund managers under perform the market by an average of 2% a year? Moreover private investors under perform the market by a further 2% a year on average? These are shocking figures.

I am proud to say that Wealth and Tax Management has a 21 year track record of a 9.8% p.a. average return for a medium risk investor compared to the FTSE100 Index which has produced an average return of 7.1% p.a. over the same period. I am convinced that our out-performance will be even greater over the next 21 years especially once our new fund The Intelligent Wealth Fund forms part of our clients’ portfolios.

The fund manager Vanguard first produced a study in 2001 called Adviser Alpha which sought to determine the difference between the return that an investor might achieve with the adviser’s help and what they might have achieved on their own. Vanguard has put a value on that difference in the UK and it comes out at 3%.

They identified 7 components that add value:

  1. Setting a suitable asset allocation.
  2. Regular rebalancing.
  3. Minimising costs.
  4. Behavioural coaching.
  5. Making the most of tax allowances.
  6. Spending strategy.
  7. Total return versus income investing.

It’s important to understand that Vanguard is not claiming per se that a typical adviser will achieve an investment return of 3% a year more than the average private investor. What Vanguard is claiming is that the combined effect of all 7 components is equivalent to an extra return of approximately 3% a year.

Now this is only one study and of course only one opinion. You could argue over the number of components and the value attributed to each one. However, in my personal experience of advising clients for 30 years, I think Vanguard’s conclusions from their study is a fair one and is very much in line with my observations over my career.

So why is it that many people still decide not to engage the services of a professional financial planner? When personal experience and independent studies show that most private investors are better off working with a financial planner it is surprising that more people do not take advice from a professional.

So what can be done about it? Well if you have friends, colleagues or relatives who need advice, why not refer them to us? They will almost certainly be better off as a result. You know it makes sense.

If you are not sure how to refer us and you enjoy reading this weekly view blog why not start by forwarding it to people you know who may be interested in speaking to us? Your support will be greatly appreciated by us.

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