Financial advisors who help clients manage their emotions during market fluctuations can add significant value to long-term investment outcomes, according to Vanguard’s latest Advisors’ Alpha research.
The study, which marks 25 years since the framework’s introduction, emphasizes that behavioral coaching may contribute up to 2 percent in additional net returns annually.
Rather than attempting to outperform the market through active management, advisors who focus on guiding investors through periods of volatility play a key role in preventing costly mistakes, the report stated. Vanguard highlighted advisors' role as “emotional circuit breakers” for clients who might otherwise react impulsively to short-term market movements.
“The most significant opportunities present themselves not consistently but intermittently, often during periods of either market duress or euphoria,” the report stated. “In such circumstances, the advisor may have the opportunity to add tens of percentage points of value-add, rather than mere basis points, and may more than offset years of advisory fees.”
Vanguard’s study traced the industry’s evolution from 2001, when many advisors still prioritized market outperformance, to a broader wealth management approach that includes behavioral coaching. A turning point came in 2014, when the firm’s Quantifying Advisor’s Alpha study formally measured the impact of coaching, concluding that its value could surpass that of investment selection.
The latest 2025 edition of Advisors’ Alpha suggests that the financial advisory industry has increasingly recognized behavioral coaching as a core function. Investors are now better at staying invested during downturns, the report said, citing data from market crises such as the 2008 financial collapse, the COVID-19 crash, and the 2022 sell-off.
Advisor-coaches are likely being tested right now. With news of President Donald Trump's tariff threats dominating headlines and clear signs of an economic slowdown, there's no shortage of strategists warning investors to buckle up for more market swings.
"Volatility will stay with us,” Philippe Gijsels, chief strategy officer at BNP Paribas Fortis, said in an interview with CNBC. “Headlines keep flowing and go in all possible directions. Besides the geopolitical uncertainty there is still the massive economic uncertainty with the U.S. clearly slowing. ... [Then there’s] tariffs, on which the ‘strategy’ changes every five minutes.”
As per a Friday report by Reuters, mounting trade war fears and a tech sector selloff drove investors out of US equity funds, with outflows in the week up to March 5 adding up to a net $9.54 billion.
According to Vanguard's research, investors who remained in balanced portfolios through the 2008, Covid-19, and 2022 scares generally saw higher long-term returns than those who took flight toward cash or bonds. While moving into lower-risk assets during volatile periods may feel like a prudent decision, the report notes that such actions often result in underperformance over time.
The study included data illustrating how portfolio outcomes varied depending on investor decisions during past market downturns. In each case, the research found those who maintained their allocations saw better financial outcomes than those who attempted to time the market.
The report highlighted several strategies advisors can use to help clients maintain discipline. Among them is proactive education – setting expectations about market fluctuations before volatility occurs, rather than reacting to client concerns in the moment.
Additionally, advisors who emphasize rebalancing over performance chasing can help clients maintain appropriate asset allocations, Vanguard suggested. Rebalancing discipline, according to the study, plays a role in keeping investors from overweighting riskier assets in bull markets or exiting equities prematurely during downturns.
The research also presented a framework for managing investor emotions, which Vanguard refers to as the “3B Mental Model.” The first component, business model, refers to recognizing that financial media often amplifies short-term market events. Advisors can help clients shift their focus away from immediate fluctuations and toward long-term financial objectives.
The second factor, biology, acknowledges that fear and stress shorten time horizons, potentially leading to reactionary investment decisions. By addressing these natural tendencies, advisors can help clients maintain perspective. The third component, behaviors, is the result of managing the first two factors, guiding clients toward better long-term decision-making.
“When clients are tempted to abandon the markets because performance has been poor or to chase the next ‘hot’ investment, advisors need to remind them of the plan that was created before emotions were involved,” the report stated.
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