Advisors Can Add About Three Percent in Net Returns for Investors

By Jason McIntyre
Head of Distribution, Vanguard Investments Canada Inc.

Recent Vanguard research shows that financial advisors not only add peace of mind, but also may add about three percentage points of value in net portfolio returns over time.

However, achieving this requires the use of low-cost, index-based investments such as exchange-traded funds (ETFs).

How is this possible?

An advisor has the ability to evaluate portfolio investments, meet with investors to discuss objectives and help get them through tough markets. All of these factored together potentially add value to net returns (returns after taxes and fees) over time.

Cost-effective investing

With portfolio construction, an advisor can create a diversified portfolio, while ensuring investors don’t pay too much for investments or in taxes on investment returns. This is where low-cost investments such as broad-based ETFs come in.

Cost-effective implementation is a critical component of every advisor’s tool kit and is based on simple math: Gross return minus costs (expense ratios, trading or frictional costs, and taxes) equals net return. Every dollar paid for management fees, trading costs and taxes is a dollar less of potential return for clients.

With the recent expansion of the ETF marketplace in Canada, advisors now have many more investments to choose from – and ETF costs tend to be among the lowest in the investment industry. We have calculated the potential value-add to Canadian investors of moving to such investments to be 1.37 per cent annually.

Holistic wealth management

An advisor can add about three per cent in net returns for clients by marrying low-cost investments with a holistic wealth management approach. Such an approach entails making regular changes to a portfolio to help reduce risk, and when investors are ready to withdraw, advisors can help them do so in a way that limits the taxes they’ll pay.

This research is not an exact science. While advisors can potentially add about three percentage points to portfolio returns over time, this is in comparison with those advisors who are not practising the above-mentioned principles. For some investors, advisors may offer much more than that in added value; for others, less.

The potential three percentage points of return come after taxes and fees. This return is not added over a specific timeframe, but can vary each year and according to your circumstances. It can be added quickly and dramatically, especially during market declines or euphoria, when investors may be tempted to abandon a well-thought-out investment plan. It may be added slowly. It will not appear on the quarterly statement, but it is real nonetheless.

Further, although every advisor has the ability to add this value, the extent of the value will vary based on each investor’s situation and the way the assets are actually managed, versus how they could have been managed. advisor’s alpha principles call for advisors to meet your individual needs.

For more information, visit our website at www.vanguardcanada.ca/advisorvalue.