The evolution of

Vanguard Advisor’s Alpha : ®

From portfolios to people

Vanguard Research July 2018

Donald G. Bennyhoff, CFA; Francis M. Kinniry Jr., CFA; and Michael A. DiJoseph, CFA

■ Trends in the investment advice industry—regulation, fees, and technology-enabled

competition—likely will continue to shape the contours of the advice industry and mold
client satisfaction.

■ As Vanguard’s Advisor’s Alpha research has suggested, for the typical advisor, the
path to greater client satisfaction and asset growth should lead to an underappreciated
destination—relationship management.

■ A focus on relationship management takes time and commitment, and requires advisors
to streamline some aspects of financial planning or wealth management and reallocate
the time saved to the clients who increasingly demand and value it.

■ Ultimately, clients determine the value of advice and, as our Advised Investor Insights™
research reveals, they clearly value and reward an advisor they highly trust with referrals
and loyalty.

■ To differentiate themselves from their competitors—both robo and human—advisors

should embrace the fact that relationship management is not “customer service” but,
rather, the crucial element of peerless financial advice.

This document is published by The Vanguard Group, Inc., the indirect parent company of Vanguard Investments Canada Inc.
It is for educational purposes only and is not a recommendation or solicitation to buy or sell any security, including any
security of any investment fund. The information is not investment advice, nor is it tailored to the needs or circumstances of
any particular investor. Research published by The Vanguard Group, Inc., may not be specific to the context of the Canadian
market and may contain data and analysis specific to non-Canadian markets and products.
Forecasting the future of advice is a popular exercise. As tempting as it may be to view U.S. regulators’
And, as with most efforts at prediction, while some emphasis on transparency and disclosure in our industry
expectations will prove more accurate than others, as more stringent today, our industry has always been
the majority will generally fall short of even the most closely regulated. Today’s efforts may seem more
forgiving standards. Such is the challenge of trying to vigorous because they are more visible now—thanks
position oneself at the forefront of change. in large part to today’s instant-news culture.

But challenging or not, the future of advice is too The 2016 U.S. presidential election raised questions
important a topic to sit idly by on, without comment. about the future path of regulation and the application
Vanguard is a large and growing provider of advice of fiduciary standards. But the genie is out of the bottle:
services and a longtime advisor to many of our Investors are more interested than ever in knowing
shareholder-owners. The future of advice seems whose interests their advisor is working for, as well as
to be unfolding before our eyes and we believe we how their advisor is paid for services. Investor interest
have useful insights to add. in this important information is unlikely to wane,
regardless of the regulatory outcome. This “great
Several drivers are shaping the future of financial awakening” of investors may be one of the most
advice: regulation; a focus on fees and compensation important and disruptive factors affecting the value
charged for products and services; and technology- proposition for advisors in the future.
assisted entrants such as robo advisors in an already
competitive marketplace. In fact, it is not just a U.S. circumstance but a global
one. In the wake of the global financial crisis, each of
While these drivers should affect the environment for the following governments (and their regulatory changes)
advice in the future, ultimately, clients determine the has implemented meaningful reforms that are intended
value of advice. Our proprietary Advised Investor Insights to protect the best interests of investors, an effort that
research highlights opportunities for advisors to adapt is most likely to continue:
to and thrive in a changing industry. These observations
•  nited States
U
confirm our long-held belief (Kinniry et al., 2016a) that
(Department of Labour fiduciary rule)
a focus on relationship management is the most
rewarding course for advisors’ prosperity—as well as • Australia (Future of Financial Advice)
for their investors’. If the drivers we discuss affect the
• United Kingdom (Retail Distribution Review)
future environment for advice as we expect, firms and
their advisors will need to be very sensitive to client •  uropean Union
E
preferences if they wish to establish profitable advice (Markets in Financial Instruments Directive II)
models and long-lasting client relationships.
• Canada (Client Relationship Models I/II)

Current influences—lasting impressions Fees and costs—heightened transparency

and awareness
Regulatory environment—global, not local,
considerations Today’s spotlight on investment fees illuminates both
the costs of investment products and the fees for
The beginning of the 21st century has not been a
investment advice. While groundbreaking changes in
quiet era for the financial markets or the advice industry.
advisor compensation have been spurred by regulation—
Two bear markets of historic magnitudes have shaped the
Australia and the United Kingdom, for example, no
investing and advice landscapes, but it was the second
longer permit fees such as sales loads, trailers, and
one—commonly referred to as the global financial crisis—
commissions—the movement away from transaction-
that led to increased scrutiny of financial services and
based advice in the United States has been both
advice that our industry is still addressing.

2
 voluntary and significant. For example, in the United 2016b), cash-flow trends and fee awareness likely
States, commissions accounted for 45% of advisors’ reflect advisors’ recommen­dations rather than investors’
compensation in 2013 and have declined significantly unaided choices.
to 32% as of 2016, a decline that is projected to
continue down to 23% of revenues in 2018 (Cerulli Technology
Associates, 2016). Technology will certainly be a critical underpinning
for success. However, given the speed of change in
Fees, too, have for some time been a consideration technology, rather than speculate on what improvements
for investors and advisors, and an issue for regulators. technology will bring to our industry, we feel it is safe to
For investment products, such as mutual funds and assume that improvements will come and their effects
exchange-traded funds, this preference for lower-cost will be profound. Today’s average smartphone has more
products has been a longer-term trend1 (Figure 1). computing power and capability than the best personal
It should also be noted that, since the majority of computers of only 25 years ago, when a fax machine
investor assets are intermediated (Spectrem Group, and a landline phone were the go-to tools for instant
messaging and chat.

Figure 1. Investors and advisors are choosing low-cost equity funds

1,000

800
$760.5B
Cumulative net cash flows ($B)

600

400

200

–$183.3B
–200 –$234.3B
–$292.6B

–400
Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec.
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
All US equity funds and ETFs, cumulative net cash flow

Quartile 1: 0.40%
Quartile 2: 0.90%
Quartile 3: 1.17%
Quartile 4: 1.74%

Notes: Expense ratio quartiles were calculated annually. Shown for each quartile are the 2016 asset-weighted average expense ratios, determined by multiplying the annual
expense ratios by the year-end assets under management and dividing by the aggregate assets in each quartile.
Sources: Vanguard calculations, using data from Morningstar, Inc.

1 While we’ve chosen to illustrate the cash-flow trends only for U.S. equity funds and ETFs, previous research by Vanguard has shown that similar trends are evident in other
asset classes, too, both in the United States and abroad. See Costs Matter, a Vanguard research paper published with versions for U.S., Canadian, and U.K. clients.

3
Figure 2. Advanced skills remain uniquely human

Basic l Repetitive ll Advanced lll

Growing Inspecting Maintaining relationships
Harvesting Monitoring Interacting with the public
Digging Assembling Persuading outcomes
Moving objects Getting information Training
Recording information Processing information Developing teams
Scheduling Applying knowledge
Strategizing
Thinking creatively
Solving problems
Assisting/caring for others
Judging quality
Conducting complex physical movements

Source: Vanguard.

We can, however, glean some insights from the past into (Figure 3). (In 2000, workers still spent just 30% of their
how technology affects the nature of industries and jobs. time on advanced tasks.) By 2015, as workers harnessed
Tasks that are repeatable and scalable and that do not productivity-enhancing technologies, the proportion of
involve uniquely human creativity or critical thinking are the workday spent on advanced tasks rose to 50%.
most susceptible to automation. And that’s usually a good That figure is sure to rise in the decades ahead.
thing. Think of the factories of the past in which employees
often worked long hours doing repetitive and sometimes
dangerous tasks. While many of those jobs have been Figure 3. The work of the future will be dominated
automated away, other jobs have been created to manage, by advanced tasks
design, and analyze the manufacturing processes.

This technological evolution is gathering momentum

and is affecting industries and workers’ efforts differently, 80%
according to a Vanguard analysis of Labour Department
data. As noted above, basic or repetitive tasks are most
Future
vulnerable, while those that rely on the creativity and 50%
adaptability of the human mind—arguably the greatest
supercomputer yet developed—might be more resilient 30% 2015
10%
(Figure 2). In fact, these advanced tasks are more likely
to harness and benefit from technology’s advances than
be replaced by them. 2000

In 1900, the typical worker spent only 10% of the workday

1900
on advanced tasks such as relationship management
and problem solving, with the remaining 90% spent on Sources: Vanguard estimates are calculated based on data from McKinsey &
basic or repetitive tasks such as gathering information Company, the U.S. Bureau of Labour Statistics, and the U.S. Department of Labour
O*Net OnLine.

4
 Financial advice has undergone the same transformation, For many key decisions, people rely on past performance
with technology liberating advisors to devote more time or expert testimonials to aid in decision-making. The
to advanced tasks. While the personal digital assistants of past-performance heuristic may serve us well in many
the recent past have been obsolesced by more effective aspects of our lives—choosing a restaurant, car, or even
and capable software to aid with client relationship a surgeon—but it is a generally unproductive way to
management, the architect of the client relationship—the choose investments. Changing this ingrained decision-
advisor—remains. And, while there is nothing physically making process and human behaviour is difficult, but can
dangerous about, say, manually rebalancing a portfolio, provide a valuable opportunity to both educate the client
a technological surrogate to help with the task allows an and potentially improve the investment results for the
advisor to allocate his or her time elsewhere. Again, that client’s portfolio. This is one reason we believe that
is a good thing. human advisors and behavioural coaching will not be
obsolesced by technology.
It is easy to view technology as a threat, but it does not
have to be. It also does not mean advisors can ignore We are fairly certain that technology will not soon be
it and risk going the way of Blockbuster.² Advisors who building deep, trusting relationships, and this insight
embrace technology and adapt to the new environment establishes the foundation for valuable behavioural
can choose to be Netflix instead. Vanguard, through its coaching efforts with clients. We do not know for sure
Advisor’s Alpha work, has been urging advisors for many how it will happen or what particular software or company
years now to redefine their value proposition away from will drive the transition, but technology will reduce the
solely managing their clients’ portfolios. That message time an advisor spends not just on routine administrative
is even more important today. Take a look at the figure tasks but also on much of what advisors have traditionally
below (Figure 4) from Vanguard’s framework for defined their value propositions around. Whether it is
quantifying the value of advice (Kinniry et al., 2016b). embracing an existing robo advisor platform, firm-level
One could argue that six of the seven common software, or even a simple spreadsheet, expect technology
opportunities to add value are now automated in some to become more pervasive. The only thing we know with
fashion, with the exception of behavioural coaching.

Figure 4. A ‘menu’ of value-added services

Vanguard Advisor’s Alpha strategy

1 2 3
Suitable asset Cost-effective Rebalancing
allocation using broadly implementation
diversified funds/ETFs (expense ratios)

4 5 6 7
Asset Spending Total-return Behavioral
location strategy versus income coaching
(withdrawal order) investing

Source: Francis M. Kinniry Jr., Colleen M. Jaconetti, Michael A. DiJoseph, Yan Zilbering, and Donald G. Bennyhoff, 2016. Putting a Value on Your Value: Quantifying
Vanguard Advisor’s Alpha. Valley Forge, Pa.: The Vanguard Group.

2 Blockbuster was a chain of American-based home movie and video game rental stores that famously failed to adapt to the threat from video streaming on-demand
services and was forced to file for bankruptcy in 2010.

5
absolute confidence is that technology will exist in the preserved) while demand for advice increases. This
not-so-distant future that we cannot even imagine today. makes it imperative for advisors and advisory firms to
Just like smartphones a short decade ago. consider the opportunities and implications of lower-price,
lower-advisor-engagement-oriented services. As long as
advice services and pricing are appropriately aligned,
A look ahead: The evolution opportunities exist across the frontier for firms willing
of the advisory offerings to pursue them.
The drivers we just discussed should lead to advice
offerings that are more transparent about both costs and This frontier for advisory offerings is framed by two critical
the degree of fiduciary obligation, as well as to a broader considerations: the level of engagement by the advisor(s)
range of choices for accessing advice. From fully digital and the price of the service or product provided. While
to full service, the future will bring a wide range of advice the pricing component is fairly straightforward, this concept
services to people in a cost-effective manner. We illustrate of engagement requires some explanation because of the
this breadth of advice choices or service offerings in what way we define “advice.”
we think of as the efficient frontier for advice services
(Figure 5). In our view, advice need not be delivered by an advisor,
but might be defined as an embedded advice solution,
We provide this illustration to help frame the discussion an investment philosophy embedded within a product or
about the breadth of potential advisory offerings; we service. A target-date fund is one example. In this case,
don’t suggest that the offerings are limited to these four a firm or advisor might be involved in the construction,
models. In fact, in the future, we expect that advisory management, or selection of the target-date fund/product,
firms and advisor teams will likely offer a combination of but thereafter may have little or no involvement with
the models along our frontier to accommodate a greater the client until the client’s preference or circumstance
range of client preferences for services and fees. Some, changes. Given the vast efficiencies of this “one-to-
however, may choose to specialize in just one advice many” service offering, the lower relative price should
model. And, as we discuss later, it is very possible that be commensurate with the lower expected engagement,
fees for advice will decline (though margins may be resulting in modest, yet profitable, opportunities.

Figure 5. The efficient frontier for advice services

Wealth
management

Digital
relationship
Pricing

Digital
advice

Embedded
advice
solutions

Adviser engagement

Source: Vanguard.

6
We think of digital advice as an offering involving a Figure 6. The keys to profitability are time
modest degree of personal (yet not necessarily face-to- and retention
face) engagement. “Robo advice” services offered by
a variety of companies are an obvious example of this
model. Providing a standard array of financial advice—

Relationship profit margins

asset allocation, rebalancing, and portfolio construction
services—for a very low fee has, in the opinion of some,
begun the process of efficiently scaling many of the
foundational tools of financial planning. Similar to
embedded advice, digital advice offers the opportunity
to provide many aspects of financial planning, as well
as low (human) engagement, while being priced lower
than subsequent offerings.

A digital relationship might be thought of as a hybrid Time

advice model, involving active engagement by an advice
professional and relying heavily on technology for commu­ Source: Vanguard.
nications with clients as well as for portfolio management.
It also relies on a client’s acceptance of and/or preference
for face-to-face communications via electronic meetings In the first years of a client relationship, as illustrated
or videoconferences, rather than the traditional person- in the J-curve (Figure 6), the high costs of onboarding
to-person meeting. Again, more dedicated time from an can make a client unprofitable. If price and engagement
advice professional should justify a higher service fee, are properly calibrated, however, an advisor soon recoups
but the higher costs and time limitations may make the the costs of onboarding and generates attractive profit
profit margins on this service model less attractive than margins. The longer a client’s tenure, the more profitable
they might seem at first glance. Achieving the right price/ the relationship becomes.
engagement balance for this service model is imperative
for the advisor or firm.
A look ahead: The evolution of the advisory practice
Finally, wealth management is most similar to today’s The efficient frontier for advice that we just discussed
traditional full-service advice model and encompasses can help serve as a framework for evaluating some of the
not only asset management and basic financial planning challenges of building advisory practices to compete for
but also tax, estate, insurance, and other specialized investor relationships in the future. First, with the wide
services. This is an admittedly broad categorization that variety of models that might be offered, should advisors
might include everything from a wirehouse team or financial offer all, some, or just one of these structures? Second,
planning firm to a family office, with diverse fee levels how might an advisor think about advice fees and operating
and services provided. Even here, wealth managers should efficiencies in the future? And finally, what might be done
embrace technology to gain the efficiencies needed to to help free up the time an advisor needs to deliver a truly
provide more time for higher-value, less scalable activities. personal client experience?
Given the relative lack of scalability in this high-engagement
service model, wealth management generally corresponds The advice models in Figure 5 tend to appeal to clients
to the highest prices. in some generalized circumstances. Younger investors just
beginning to build wealth tend to favour the offerings
The goal in all of these models is to cultivate long-term toward the very left on our advice frontier, while clients
relationships that can help clients meet their goals and with more assets and more complicated financial
help advisors build successful practices. The key circumstances tend to favour the far right. But a fairly large
difference among the models is the advisor’s level of and less easily defined client cohort is finding the middle
engagement, and thus the cost to serve. of the frontier appealing, too. These moderate-
engagement models—which benefit strongly from

7
technological improvements that streamline client as business succession/sale planning, are some of the
onboarding, financial plan creation, portfolio construction, areas where advisors could apply more specialized skills
and ongoing portfolio management—should be viewed as and provide a differentiated degree of value. Pricing
an attractive opportunity area. advice services relative to the potential value-added
opportunities and advisor engagement should be an
Traditionally, advisory practices have tended to favour important consideration if the future of advice is as
wealth management practice models, preferring the higher competitive as we expect it to be.
fees and greater opportunities for value-added services that
are associated with wealthier clients. In many ways this Providing a greater variety of advice models enables
makes sense, as the efficient frontier of advice closely an advisor to best satisfy the preferences of the investors
follows the opportunities for advisors to add value as who are likely to become a firm’s wealth management
outlined in Figure 4. Building cost-effective portfolios and clients of the future. Otherwise, by the time a client builds
rebalancing them tends to provide a lower relative value enough wealth to make him or her a more ideal wealth
opportunity and might align best with the embedded advice management prospect, the client may already have built
or digital advice models. Higher added-value services, a relationship with a competitor. Figure 7 looks at these
such as customized retirement income strategies and considerations from a different perspective. While
behavioural coaching, will probably be most effective where technology may create opportunities to deliver advice
there is greater advisor engagement (as in the digital more broadly and inexpensively, the increased
relationship or wealth management models) and should be personalization that some wealth management advice
less prone to technology-enabled advice substitution. requires means the advice is more immune to automation.

There may also be other opportunities that are unique to While broadening advice models may be more of an
the client’s circumstance and tend to correlate positively option for an advisory firm than for an advisor working
with wealth. Estate, tax, and charitable planning, as well for a firm, there may be opportunities for advisors to

Figure 7. Not all advice can be automated

High

Family-owned business strategies

Charitable giving strategies

Insurance

Accounting & tax services

Personalization

Estate planning & trust services

Behavioural coaching

Spending strategies

Asset location

Total return versus income investing

Rebalancing

Cost-effective implementation

Suitable asset allocation using broadly diversified funds/ETFs

Lower Value/Immunity to automation Higher

n Embedded advice solutions n Digital advice n Digital relationship n Wealth management

Source: Vanguard.

8
 tailor their practice to provide for a greater flexibility in By our estimation, the average annual fee³ paid to
advice. For example, advisory teams are common and advisors is 1.07% (Figure 8). Does that mean that a
the benefits are obvious: They can add diverse skills firm offering advice for 0.5% is a better value? Not
to facilitate a broader range of advice services, as well necessarily, as value is very subjective and reflects
as more time to accommodate a larger number of not only the cost of the service but also the services
clients. It is one reason that we expect advisory teams an investor receives. This is why investors shouldn’t
to dominate advice in the future. It also provides the focus only on advice choices that charge the least or
opportunity to add more diverse personalities. This is an on choices that offer the most advice and planning
often overlooked aspect of team-building but one that services. They should focus on both and balance each
helps teams achieve a good advisor fit for a client— of these considerations with their unique circumstance.
often, an important step in relationship- and trust-building. And it is incumbent upon advisors to clearly communicate
And, larger, more diverse teams provide the opportunity their value, which can be considerable over the course
for more comprehensive succession planning, benefiting of a relationship and yet may not be made explicit by
both teams and firms alike. a client’s performance statement.

The rapid expansion of investment products and strategy That said, the future is likely to be shaped by a lower
offerings has contributed to the choice overload that has advisory fee world. The environment will likely be one
led many investors to seek help from advisors. However, of “doing more for less.” This is common for a maturing
choosing an advisor can be a challenge unto itself, as the industry. It may be fitting that the industry responsible for
variety of advice offerings and fee differentials makes the providing some of the catalysts for efficiencies and lower
value proposition for advice more difficult than ever. advisory fees is the industry that itself is one of the best

Figure 8. Fee compression is a reality

1.6%

1.2 1.39
1.28
1.09 1.07
0.8 0.92

0.70
0.4
The future?
0
Mass market Middle market Mass-affluent Affluent market High-net-worth All
market market
Median asset-weighted advisory fees (%)

Range of fees (median fee)

Notes: Advisory fees are reported by account size, rather than core market. For calculation purposes, we matched each core market to the closest account size. Mass market
is $100,000; middle market is $300,000; mass affluent market is the average of $750,000 and $1.5 million; affluent market is the average of $1.5 million and $5 million; high-
net-worth market is $10 million.
Sources: Vanguard calculations using data from Cerulli Associates.

3 This is asset-weighted to better reflect the “average fee” paid per dollar for advice.

9
examples of doing more for less—technology. Today’s Many firms or investment platforms provide a wide
personal computers are far more powerful and inexpensive variety of model portfolio solutions, so it is easier than
than computers of only a decade or two ago and so, too, ever to match a portfolio with a client’s objectives in
are their components. Companies, regardless of their a personal yet efficient manner. The benefits are clear
industry, need to adapt and evolve or face extinction. for both clients and advisors: Less wealthy or younger
Darwinism is a powerful force in capitalism. clients who are often underserved gain the investment
and behavioural coaching they want, while younger
In our view, if advisory fees decline, then both operational advisors gain experience and add value by building
efficiencies and scale become more important, as does relationships with clients who might otherwise escape
client retention. While fee compression seems to be the attention of the advisory team.
the principal concern in our industry, cost compression
should be the solution. Streamlining operational tasks
such as onboarding clients, as well as some portfolio A look ahead: The evolution of the advisor
tasks (e.g. rebalancing), frees advisors and their teams The investment advice industry has already evolved in
to provide other, more highly valued services and many ways, but perhaps none is more significant than
client touchpoints utilizing the advanced skills shown the transition from commission-based compensation
in Figure 2. to an asset-based fee structure. The fact that such a
large portion of the industry has voluntarily embraced
While technology is the most likely catalyst for change fee-based compensation is encouraging. As a result of
in streamlining these efforts, an effective use of a team’s this transition, asset gathering and retention, rather than
personnel may be a more appropriate, productive, and transactions, should be the focal point for a successful
immediate solution. For example, the typical advisory practice, as the advisor’s upfront investment of time in
team comprises a variety of skills and experience levels. the client relationship takes a longer time to recoup,
Taking a page from the triage model used in medicine, compared with the commission-based model. And
while one professional may determine that a patient improving asset gathering and retention depends largely
needs surgery, another professional may perform the on a focus on relationship management—particularly, the
surgery. And, if the circumstance requires an even more level of trust that a client has in the advisor—rather than
specialized degree of experience and skill, a different portfolio management.
surgeon entirely may perform the procedure. In the
financial advisory business, this same triage might enable This is in no way meant to denigrate the investment
one professional to conduct the client onboarding and knowledge and experience that an advisor can provide
initial assessment, another to prepare the financial plan, to investors. In fact, it is a recognition of the value of
and a third to help with insurance, estate, or tax planning. those skills when they’re applied where they can make
the greatest difference: client relationships. Advisors can
Less experienced advisors are often tasked with helping guide their clients to improve their investment outcomes
clients with smaller assets and less complicated needs. by helping them better understand an all-too-common
These efforts may be more effective and scalable when reality: Investment “failure” results more often from
paired with the digital relationship or digital advice models not keeping pace with the returns from asset class
we discussed earlier. Typically, these clients are early in beta than not successfully capturing alpha. The paradox
their investing efforts, have more straightforward needs of skill and zero-sum game illustrate how difficult it is to
such as increasing contribution levels or reducing debt, successfully deliver excess returns, meaning that a value
and can benefit from the behavioural coaching that an proposition based on investment outperformance has a
advisor can provide. reasonably high probability of resulting in disappointed

10
 Figure 9. Relationship management is business development

a. How current advisor was found b. Likelihood of selecting an advisor, based on referral source

60% 56% 90%

50
80 79%
Respondents

Respondents
40
71% 71%
30 70 69% 69% 68%

20 19%
60
10 7% 7%

0 50
Referral Local Event Personal Immediate Extended Friend Colleague Another Another
office sponsored relationship family family financial professional
by adviser with adviser adviser
Referral source

Sources: Vanguard and Chadwick Martin Bailey.

clients. By applying their knowledge and experience practice is well-recognized. In fact, increasing the number
to relationship-oriented efforts, such as behavioural of referrals they receive is a top priority for many advisors.
coaching, advisors improve the probability of However, the magnitude of difference between finding
satisfying clients. an advisor through a referral and finding one through
other common means (as shown in Figure 9a) is quite
It is tempting to equate relationship management with significant and worth consideration.
customer service. And, while the association is partially
correct, it is an incomplete picture of relationship Often, the solution to this issue focuses on improving
management and the scale of the benefit if done well. the sources of referrals (centers of influence). As we
Relationship management is business development. can see above, with the possible exception of a referral
from an immediate family member, the source of the
Our Advised Investor Insights4 research can help illustrate referral is less important to investors choosing an advisor
this more clearly. Nearly 4,000 individual investors were than the fact that they were referred to the advisor in
surveyed, and, when asked how they found their current the first place (Figure 9b). And, while this is not shown
advisor, the majority said they were referred to the in Figure 9b, an average of 78% of respondents in our
advisor (Figure 9a). This response is not likely to surprise survey reported that they selected the advisor they had
many advisors, as the importance of referrals in building a been referred to.

4 Vanguard’s Advised Investor Insights is an ongoing, proprietary research series that provides actionable insights on investor behaviour.

11
Figure 10. Trust motivates referrals and drives asset retention

a. Extremely likely or likely to offer referral b. Extremely likely or likely to switch advisors

100% 94% 100%

80 80
70%
Respondents

Respondents
60 60

42%
40 40

20 20 13%

0% 2%
0 0
High trust Mid-trust Low trust High trust Mid-trust Low trust

Sources: Vanguard and Chadwick Martin Bailey.

Given the very high conversion rate of referrals into So what can advisors do to increase the levels of client
clients, what should advisors focus on to increase trust? Unfortunately, there is no simple answer: Client
their chances of gaining a referral? In a word, trust. relationships are complicated and what builds trust with
Respondents in our research indicated that, when they one client may not work as well with others. Our research
highly trusted their advisor, they were “extremely likely suggests that higher levels of trust are associated with
or likely” to refer them to others (Figure 10a). Now this, longer-term client relationships, which makes sense. But
too, may not seem like a groundbreaking conclusion, but, what can advisors do to help retain clients long enough
again, the magnitude of the differential is most notable: to establish high levels of trust?
Clients who highly trust their advisors are more than
twice as likely to refer their advisor as those who have Perhaps a better understanding of the components of
more modest levels of trust in them. To maximize the trust can help. “Trust” means different things to different
chance of being referred by clients, and, just as critically, people (Figure 11). An ethical framework (in which clients
to retain the clients they already have (Figure 10b), believe advisors are “acting in my best interests”) or a
advisors need to achieve a very high level of trust and functional framework (in which clients believe their
that is likely to require both their time and attention. advisors do “what they say they will do”) are often the

Figure 11. The components of trust

Functional Emotional Ethical

17% 53% 30%

Does what the Allows me to sleep Will act in my best
adviser says better at night interest at all times
he/she will do

Source: Vanguard.

12
first definitions that come to mind. But the emotional Figure 12. Time is an asset to be invested
component (peace of mind) is often underappreciated.
The impact of the emotional component is clear, based Advisor time allocation by activity
on our Advised Investor Insight data—53% of respondents
listed the emotional component as the most important
component of trust in their advisory relationship. And
certain emotions lead to both higher levels of trust and
55.2% Client-facing activities
quicker attainment of it. To drive trust in their relationships,
20.5% Administrative
advisors should make sure that clients feel valued, that 19.4% Investment management
they are respected, and that their objectives and feelings 4.9% Training and professional
are understood. development

Care should be taken not only with what is said but

also how it is said if advisors want to send the right Source: Cerulli Associates, US Advisor Metrics 2016.
message to clients. To help convey to clients that they
are valued, advisors should make clear that they are
extremely conscious of what clients value most. For
example, asking, “How are Judy and Jimmy?” says hours out of a 40-hour workweek. While it’s unreasonable
something entirely different about your familiarity with to expect that advisors can divorce themselves from all
a client’s family than simply asking, “How are the kids?” administrative tasks, is it unreasonable to expect that a
For many clients, their greatest treasure is their family. prudent use of time, staffing, and perhaps technology
Similarly, saying that you speak with clients rather than might help the typical advisor recapture half that time?
to them may send the message that you will work with How many client or prospect connections could be
them as a respected partner, rather than as a novice. made with four additional hours each week?
Little nuances can make a large impression, and
speak volumes. Similarly, while advisors should not divest themselves
of all investment management responsibilities, they
Generally speaking, trust must be nurtured opportunity may have some good alternatives to building and
by opportunity, and that takes time. For the typical maintaining client portfolios security by security. Here
advisor, however, time is in short supply but high again, technology may be useful, but a simpler answer
demand. The level of an advisor’s expected engagement may be a change in investment philosophy. Today,
that we discussed earlier is an important consideration, many firms and platforms provide managed solutions
as it directly affects the time an advisor has available for that warrant consideration, such as ETF model portfolios
clients. This, in turn, affects the total number of clients and separately managed accounts. Managed solutions
an advisor can take care of effectively. exist to fit most investment strategies and, as a result,
should not be viewed as impersonal, generic portfolios
So how might the average advisor free up more time (as they too often are) as long as the advisor matches
for clients? The good news is that advisors already seem the managed solution to the client’s circumstances.
to spend most of their time engaged with their clients
(Figure 12). However, a meaningful amount of time is Advisors in the Cerulli survey reported that they spend
still spent on efforts that might be handled effectively— nearly 10% (included in investment management in
possibly more effectively—by means other than an Figure 12) of their time on research and due diligence.
advisor’s direct involvement. For example, fully one-fifth That’s nearly another four hours a week. If advisors
of advisors’ time is spent on administrative tasks, defined combine those time savings with the time saved on
in a survey by research firm Cerulli Associates as office administrative tasks, several dozen more value-added
administration, management, and operations, as well as client opportunities each month should be possible.
compliance and other similar tasks. That’s about eight

13
 Time is a finite resource, an asset to be invested, not
Cultivating—and preserving—client trust spent. This factor should not be considered casually:
Our Advised Investor Insights indicate that “being Clients across various wealth cohorts have indicated
the client’s advocate” and “acting in the client’s that a primary reason they switched advisors was the
best interest” are the most important drivers of perceived lack of time and attention they received from
trust. Clients most often lose trust in their advisors their advisor (Figure 13, on page 15). Clients are asking
because they “did not pay enough attention to me for more of their advisors’ time, not less.
or my portfolio.”
As Figure 13 also illustrates, while clients do not ignore
These survey responses suggest possible strategies performance, it may not be as significant a factor in client
for cultivating—and preserving—client trust. retention as many advisors believe. It is understandable
that, after investing so much time in themselves as
Be the client’s ally and advocate: When evaluating investment professionals, many advisors believe this to
investments, many clients rely on a mental be the source of their value-add. However, we believe
shortcut, or “heuristic,” that works well in other that advisors’ value propositions should be based
purchase decisions: past performance. In investing, foremost on their relationship-management capabilities,
however, past performance is an unreliable guide to which are too often underappreciated (Kinniry et al.,
the future. Skillful coaching and communication can 2016a). Much of an advisor’s investment knowledge is
help clients adopt a more productive approach. based on experience and judgment, a valuable resource
Some tactics: for decision-making as well as behavioural coaching. As a
result, reallocating time from portfolio construction-related
• Reframe the investment objective as meeting tasks to relationship management seems to be a very
long-term goals, not exceeding an arbitrary prudent investment indeed.
performance target.

• Educate as an ally. Acknowledge that both you The conclusions from Figure 13 may contrast sharply
and the client are subject to the same behavioural with the perceptions of advisors, who reported that
biases and stimuli that can lead to counter­ performance was very often the factor that motivated
productive behaviour. Explain how research and clients to move to another advisor (Vanguard, 2016).
experience have taught you that a focus on We believe the majority of advisors want to serve the
goals, rather than performance, is the basis for interests of their clients to the best of their ability.
a successful plan. (See Kinniry et al., 2016b). However, this disconnect between perception and
reality—clients prioritizing relationship management
Act in the client’s best interest: An understanding
over portfolio management—creates an unprosperous
of client costs and profitability may suggest novel circle: The more time advisors spend on portfolio- or
ways to demonstrate commitment to the client’s performance-related tasks, the less time they have
interest. Long-tenured clients, for example, are for client relationships, which suffer as clients
generally the most profitable. If a firm has the feel neglected.
flexibility to offer one, a longevity discount can
serve as an incentive for clients to remain in the
relationship and a demonstration of the alignment
between the client’s interests and yours.

14
Figure 13. Clients are evaluating their advisor’s performance more than their portfolios’

Reason for switching advisors Total Respondents by wealth segment (%)

64%
Net: Personality/service levels 65% 65%
70%

18%
Advisor neglected relationship 19% 22%
25%

18%
Not proactive with recommendations/opportunities 18% 17%
22%

16%
I sensed an ulterior motive (pushing certain stocks) 16% 17%
19%

16%
Transferred me to another member of their team 16% 15%
5%

9%
Didn’t fully understand my goals and needs 10% 13%
20%

10%
Not available when I need to talk/doesn’t return calls 10% 8%
10%

38%
Net: Performance/portfolio 39% 41%
53%

17%
Poor investments that caused me to lose money 18% 19%
20%

11%
Poor response to market downturn 12% 13%
11%

11%
Underperforming a key index (e.g., S&P) 11% 12%
20%

10%
Returns lower than my peers 10% 10%
12%

24%
Net: Advisor moved to a new firm 23% 20%
16%

Mass affluent High net worth Ultra-high net worth

Sources: Vanguard and Chadwick Martin Bailey.

15
Conclusion
Changes to the advice industry in the future are inevitable. As illustrated by our Advisor’s Alpha flywheel (Figure 14),
The forces spurring these changes—regulations, fees, the industry evolution that we’ve described in this paper
and technology—should benefit both advisors and their creates a virtuous circle, benefiting both clients and
clients, rather than result in an Orwellian dystopia. advisors alike. With this outcome in mind, who could
Regulatory efforts to clearly define an advisor’s level be so pessimistic as to believe that the future for the
of responsibility for a client’s best interests should advice industry is not a bright one?
increase investor confidence and perhaps encourage
many more investors to seek advice. While attention
to fee transparency and investment costs may result in Figure 14. Vanguard Advisor’s Alpha flywheel
fee compression, the efficiencies and benefits of cost
compression and time management should allow firms
to remain competitive and profitable. The trend toward
technologically enabled advice is both friend and foe, Personalised
bringing an increased opportunity for firms to profitably financial
planning
serve a larger number of clients and deliver Advisor’s
Alpha even as it brings to the market potentially more
Asset &
competition for advised clients. Asset wealth
retention management
& referrals services
Ultimately, clients decide the value of advice and, as our
Advised Investor Insights research reveals, they clearly Highly
value and reward an advisor they highly trust. To establish trusted
this level of trust takes time and a concerted effort from adviser
an advisor, and time is a limited resource. However,
advisors have a number of tools and strategies to better Client loyalty Behavioural &
use what time they have: They can use technology- & trust life coaching
enabled efficiencies to streamline client onboarding,
portfolio construction, and ongoing management; form
advisory teams to capitalize on the diverse skills and Deeper
relationship
increased capacity to serve clients well; and use every
contact with clients as an opportunity to make them feel
valued, respected, and cared for. Advisors must judge
for themselves the best use of their limited time, but Source: Vanguard.
the profits from allocating more time to their client
relationships may be unsurpassed by other efforts.

16
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