Vanguard offers new framework for financial advice

Advisers' value to clients has three components: portfolio, financial and emotional.

Vanguard Group issued a new framework for financial advice Monday that’s meant to assess the overall value of advice by looking more holistically at the end result for clients beyond what Vanguard considers to be the industry norm.

The framework centers around three pillars of adviser value — portfolio, financial and emotional — and is underpinned by data gathered from investors in Vanguard’s hybrid robo-adviser, Personal Advisor Services. The hybrid robo managed more than $140 billion as of June 30.

These pillars will look familiar to many financial advisers, who may ask: What’s new here?

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Stephen Utkus, director of Vanguard’s Center for Investor Research, said traditional advisers and earlier research into adviser value often overemphasize one of the three pillars — generally, the value of portfolio construction — at the expense of the others, rather than thinking of them in a unified way.

“There’s a certain maturation under way to think about value,” Mr. Utkus said.

“It’s not just portfolio construction or fees and tax efficiency of the portfolio,” he added. “We also have to think about success in attaining financial goals in a broader quantitative measure and investor well-being.”

Vanguard’s research, “Assessing the value of advice,” which was published Monday, finds financial advice yields better equity allocations, eliminating home-country bias as well as single-stock risk and overconcentration in cash holdings.

For example, two-thirds of investors saw “material” equity allocation changes (increases or reductions of more than 10 percentage points), while nearly three in ten saw cash holdings decrease by at least 10 points. Vanguard used a sample of more than 44,000 investors who were self-directed and then began using its hybrid robo-adviser between 2014 and 2018.

[More: The robo-advice market is growing, but changing]

However, when it comes to quantifiable advice measures, portfolio construction success isn’t enough — it’s necessary to examine what overall success looks like for an investor, according to Mr. Utkus and senior research analyst Cynthia Pagliaro, who co-authored the report.

Financial value, they said, can encompass saving and spending behavior, debt levels, retirement planning around cash flow, income and health costs, insurance and risk management, and estate planning. A secure retirement was the most commonly cited goal of investors using Vanguard’s hybrid robo. Roughly 80% of these investors had an 80% or greater probability of hitting their retirement goal.

Vanguard’s research also aimed at measuring the emotional value of financial advice, or the financial well-being and peace of mind the advice delivers. This includes an investor’s sense of trust and confidence, feeling of accomplishment and emotional connection with an adviser, as well as the support offered during market volatility or other shocks such as job loss.

“You can do all the numbers in a portfolio value and financial value, but you have to remember that there’s an emotional side to all these buying decisions and it’s a critical part of the outcomes,” said Mr. Utkus.

Vanguard found that the emotional aspects of an advice relationship accounts for nearly half of the overall value — though this will vary among different investors and advisers, Vanguard said. It surveyed 504 of investors who use its hybrid robo about their perceptions of value.