One of the most common knocks against index funds is that they guarantee you average returns minus fees and, by golly, clients need above average returns or else they're going to start looking for a new adviser.
But it's silly to think that the only way an adviser can add alpha to a client's portfolio is by finding the next hot fund manager, sector or stock.
In fact, for advisers, adding alpha is as simple as making savvy tax moves, and stopping clients from making classic investing mistakes such as buying high and selling low, and thinking short-term instead of long-term. These are all basic things that mom-and-pop investors probably aren't thinking about on their own, and that an adviser can actually control, unlike, say, the market's returns.
So even by using index funds, which are designed to give investors the market's return, minus fees, an adviser can add performance to a portfolio that clients likely wouldn't get on their own.
MAKING A DIFFERENCE
“Advisers are the alpha,” said Martha King, managing director of The Vanguard Group Inc.'s financial adviser services division.
“It's not about stock picking anymore,” she said. “Advisers can make a difference through their coaching and their guidance.”
The shift is already well under way within the financial advice industry, but becoming comfortable with pitching themselves as the alpha to clients, rather than promising to kick the pants off the market, is one of the biggest challenges advisers face this year, Ms. King said.
“Many advisers are still in the midst of that turn,” she said.