Vanguard CIO Tim Buckley delivers keynote address at Inside ETFs
January 27, 2014
Recent years have had their share of extraordinary economic and financial events: Unprecedented monetary policy has inflated the balance sheets of central banks across the globe, historically low short-term interest rates have punished savers while encouraging risk takers, and uncertainty lurks over the longer-term effects of the Federal Reserve's tapering of its bond purchasing program.
Against such a topsy-turvy backdrop, thoughtful financial advisors have found themselves feeling pressure from many directions, Vanguard Chief Investment Officer Tim Buckley said in a speech today.
Mr. Buckley gave the keynote address this morning to attendees of IndexUniverse's seventh annual Inside ETFs conference. The event is taking place in Hollywood, Florida, and continues through Wednesday.
Even with the confluence of many factors making advisors' jobs more difficult, there is news worth celebrating, Mr. Buckley said: Advisors who apply a set of basic concepts he outlined can add about three percentage points to their clients' annual returns, compared with advisors or unadvised investors who ignore the concepts.
"Advisors under pressure"
Mr. Buckley elaborated on a few of the sources of pressure advisors face in this era of postfinancial crisis:
- Pressure from their clients to generate impressive returns at a time when yields for investment-grade bonds are sputtering and stocks have already experienced a one-year run-up exceeding 30%.
- Competitive pressure to outperform other advisory firms and to land the next big client.
- Pressure from the fund industry to embrace new products marketed with words like "innovation" but that happen to be, in reality, mere proliferation.
As a result of these pressures, much of the industry's focus tends to be on product, Mr. Buckley said. Product pitches promote myriad ways to obtain a new angle or gain a competitive edge that offers an investing panacea, he said. But the real answer lies with advisors themselves, he added.
The value of an advisor
Guiding clients to investing success happens not as a result of some fanciful, perfect product but from advisors' adherence to certain guiding principles, Mr. Buckley said. Among the best practices followed by the most successful advisors:
- Being a behavioral coach who helps clients to get on the right path and prevents them from taking wrong turns.
- Being tax-efficient through prudent asset location and tax-smart spending strategies.
- Keeping investment costs low.
- Rebalancing in a disciplined fashion.
Vanguard believes that advisors who successfully apply these basic concepts can add about three percentage points to their clients' annual returns versus advisors who don't. This Vanguard Advisor's Alpha™ is a framework that Vanguard has determined constitutes "best practices" for wealth management.1
In closing, Mr. Buckley thanked financial advisors for what they do in the service of their clients: Having important conversations with them, caring about their clients' goals, and making the kind of difference that makes clients' achievement of their dreams possible.
Vanguard is tweeting from the Inside ETFs conference. Join the conversation by following @Vanguard_FA on Twitter. You can use the conference hashtag, #InsideETFs.
1The extent of actual value added varies by an advisor's adherence to the described practices, the manner of a client's portfolio management historically, and the client's investment horizon and tax situation. Potential value will most likely not be apparent on a quarterly or annual statement as an identifiable excess return over a passive portfolio. Instead, advisor value is considered additive in the sense that it subtracts less on an after-tax, after-fee, after-costs basis than would the performance of an average investor, advised or otherwise.
Vanguard's calculations are based on long-term historical relationships and have the potential to add the value stated or more in a given scenario where best practices are used. However, because the calculations are time-period dependent and sensitive to certain model assumptions, they could show, for significant periods, little value being generated or even negative value.
- All investments are subject to risk, including possible loss of principal.
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