Alpha Redux – How to Add 3% to Your Market Returns Every Year
Providing a good value was a cornerstone of Harbor’s mission and objectives from the beginning. We were successful at offering a better group of services than the brokerage industry and most other financial planners (as we were known then) of the time and have continued to do so. Nevertheless our value is a subject I frequently re-explore. My thought process begins by separating the consulting or planning advisory from the asset management services and then asked what value do we bring?
The creation of a thorough financial plan is of huge value in that it is a road map tailored to the individual. Knowing where you are going increases your chance of success many times over. While time consuming for both the wealth manager and the client the process is well worth it. The plan also dramatically decreases the possibility for an error or omission that can seriously derail your progress. Examples include gaps in casualty, disability and life insurance coverage, failure to change beneficiaries on your retirement plans after divorce, failure to save for your future obligations, forgotten assets, missed opportunities with tax and cash flow planning, the list goes on. Any or all of these items can be very costly. Guidance and a financial partnership with someone who knows your resources, goals and history is priceless and often keeps an individual or family on track. It is easy to get derailed given the buffeting nature of life events, the role that emotion plays not to mention we are all busy and sometimes make rash decisions. Check lists, reminders, attention to detail and a periodic view all add to the success rate and are reassuring.
On the investments management side a historically notable catalyst for the value introspection was the strong return market of the late 1900’s followed by a sharp correction in the early 2000’s. This led us to examine our performance in both up and down markets (the TAS analysis was created at the time) and also to compare the portfolio returns and risk with passive portfolios (ETF’s and Index funds). This isolates manager selection which in turn helps to determine and track what value we bring to the table with our active management. We have continued to compare our returns to major indexes and continually focus on investor communication. Our returns are quite good when compared to the index returns and we have a good history of taking profits from equity markets at the peak.
Recent studies have indicated that professional management adds an average of 3 percentage points per year in return over portfolios not professionally advised and monitored[1].
Vanguard agrees and has recently come out with a report that addresses these subjects with interesting results. According to the study, all in the net benefit a good wealth manager can bring the client is 3% per year in overall return advantage. This assumes the advisor provides inexpensive asset management, financial planning services or wealth management as we call it and successful behaviors coaching.
Not all advisors, financial planners or wealth mangers are created equally, some do not offer wealth management advice, others fees are high, still others have soft compensation in the form of insurance commissions, payments from mutual funds placements and the like. A closer look is warranted. Our considerations for Harbors’ value are:
Peace of mind – Our clients tell us this is at the top of the list. They have a partner they can call on and worry much less because they have a trusted ally.
A plan to refer to – As aforementioned laying out a plan tailored to you and your needs and goals is a huge determinant in your success financially.
Organization – Getting ones affairs in order and in one place is a significant value to the wealth management process. In addition to the plan itself we provide personal financial organizers, act as a repository for documents, historical records and are a virtual clearing house for your other advisors, family members and loved ones.
Measurable economic management of assets – Our portfolios and model allocations are structured for the highest risk adjusted return possible. Choosing low priced strategies drives more to the bottom line returns. We monitor and compare our returns to the major benchmarks striving to always out perform with our manager selection.
We know when to ‘fold ‘em’ – We have experience over 32 years of market cycles, successfully taking profits and exiting the market when necessary as was the case in 1990, 2007 and 2008.
Vanguard’s research into the measurable benefits of working with a competent Wealth Manager resulted in what they call ‘Advisors Alpha’. For a complete breakdown and further explanation please read the Vanguard study in its entirety here: https://advisors.vanguard.com/iwe/pdf/ISGQVAA.pdf?cbdForceDomain=true
[1] Tergesen, Anne. “Your 401(k) plan’s secret weapon”. MarketWatch, The Wall Street Journal, May 13, 2014.