How to Start the advisor’s alpha conversation - CB Supplies

How to Start the advisor's alpha conversation

Vanguard Advisor's AlphaTM

Shifting from a performance-based advisory framework to one focused on wealth management and behavioural coaching can be challenging for both 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

Emphasis: Outperformance

Tools:

Security selection Tactical shifts Manager selection

Advisor's alpha model

Emphasis: Holistic nancial planning

Tools: Holistic nancial planning Investment performance

Portfolio construction Behaviour coaching Wealth management

Sources: The Vanguard Group, Inc., calculations, using data from Morningstar, Inc., Dow Jones and Thomson Reuters Datastream.

Notes: U.S. actively managed funds versus Dow Jones U.S. Total Stock Market Float Adjusted Index. Canadian actively managed funds versus their appropriate style benchmarks. The style benchmarks used are MSCI Canada Large Cap Index, MSCI Canada Mid Cap Index and MSCI Canada Small Cap Index.

For financial advisor use only. Not for public distribution.

1Establish and de ne client/advisor relationship

2 Gather client data and set goals

6 Monitor the plan

The nancial plan

Evaluate

3 client nancial status

5 Help client implement the plan

4 Develop recommendations and alternatives

Create a financial plan and encourage clients to stick with it

A carefully conceived financial plan is a must-have for every client. It contains a wealth of information, including short- and long-term objectives, risk preference and anticipated savings rate. It's the blueprint that spells out the details of your client's short- and long-term financial well-being, including the investment-return rate the client requires to achieve his or her goals.

The financial plan forces a commitment to discipline through up and down markets. From a behavioural finance standpoint, a financial plan allows you to provide meaningful counsel that can reduce client anxiety, confirm progress and keep clients on track.

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 decisions that run counter to their best interests or cause them to stray from their plans.

Determine whether your clients' investment returns are required or desired

The financial planning process should result in an 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 the investment returns they desire and the returns they require to achieve their short- and long-term goals.

For many clients, sticking with a more conservative allocation tied to their required return lowers portfolio volatility and gives them the confidence to remain invested for the long term.

Helping your clients appreciate the difference between required and desired returns can prove beneficial for you, as well. A required-return allocation lets you employ strategies that reduce the need for excessive allocations to risky investments and the pressure to hit investment home runs.

For financial advisor use 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

0

?20

?40 U.S. bonds outperform world stocks

?60 1990

Cash ow: Equities Cash ow: Bonds

1999 2000 2001 2002

$162B ?7B

$81B 83B

2006 2007 2008

2012

$393B 194B

?$58B 1,266B

2017

$258B ?51B

$50B 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.

There's more to learn about Vanguard Advisor's Alpha. Contact your sales executive at 888-293-6728, or visit us at vanguardcanada.ca/advisorsalpha.

For financial advisor use only. Not for public distribution.

Annual benchmark returns

40%

30

20

10

0

?10

?20

?30

?40

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

40% 30 20 10

0 ?10 ?20 ?30 ?40

2004

2005

2006

2007

2008

2009

Dow Jones U.S. Total Stock Market Float Adjusted Index Bloomberg Barclays U.S. Aggregate Bond Index MSCI US Broad Market Index

2010

2011

2012

2013

2014

2015

2016

2017

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.

Start with a plan

Client note

A carefully conceived financial plan is a must-have for every investor. It contains a wealth of information, including your short- and long-term objectives, risk aversion and anticipated savings rate. It's the blueprint that spells out the details of your short- and long-term financial well-being.

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.

The chart below illustrates a common pitfall of investor behaviour. The chart shows that, historically, investors have bought stocks when the market was at or near its peak and sold them when the market was declining, a classic illustration of chasing returns. Sticking with your financial plan can help you avoid decisions that run counter to your best interests.

12-month equity return

Cash flows tend to follow performance

Net ow (billions)

$25 20 15 10 5 0 ?5

?10 ?15 ?20 ?25

Dec. 2006

Dec. 2007

Dec. 2008

Dec. 2009

Equity ow (left axis) Equity returns (right axis)

Dec. 2010

Dec. 2011

Year

Dec. 2012

Dec. 2013

Dec. 2014

Dec. 2015

60% 50 40 30 20 10

0

?10

?20

?30

?40

?50 Dec. 2016

Notes: Cash flows represent net cash moving in or out of equity funds. Market returns are based on the S&P/TSX Composite Index. Sources: Morningstar, Inc. for cash-flow data; Thomson Reuters Datastream for market returns.

Use the corresponding client note, Start with a plan, to help in your conversations with clients.

Connect with Vanguard? > vanguardcanada.ca/advisorsalpha > 888-293-6728

Date of publication: December 2018. While this information has been compiled from sources believed to be reliable, Vanguard Investments Canada Inc. does not guarantee the accuracy, completeness, timeliness or reliability of this information or any results from its use. This material is for informational purposes only. Information, figures and charts are summarized for illustrative purposes only and are subject to change without notice. In this material, references to "Vanguard" are provided for convenience only and may refer to, where applicable, only The Vanguard Group, Inc., and/or may include its affiliates, including Vanguard Investments Canada Inc.

For financial advisor use only. Not for public distribution.

Vanguard Investments Canada Inc.

? 2019 Vanguard Investments Canada Inc. All rights reserved. HTSAAC_CA 012019

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