Download the 3.21.25 Dynamic Portfolio Perspectives for advisors’ use with clients

By Lucas Felbel, CFP®, CIMA ®, Director, Dynamic Asset Management

As a wealth advisor, what’s more important than adding value to your client’s portfolio? Anyone can buy a fund — but figuring out the individual needs of your client, tailoring a diversified portfolio to their unique characteristics and risk tolerance, finding cost savings and tax efficiencies that work best for them and managing their expectations — that’s what makes your holistic perspective so important. And, of course, you can’t do any of that without knowing your client, understanding their long-term goals and building a relationship based on trust.

That relationship is the foundation of your value. But just how much value can you add?

In a paper that should be on every advisor’s reading list, “Putting a value on your value: Quantifying Vanguard’s Advisor’s Alpha®,” Vanguard outlined seven steps to best achieve value. As esteemed financial personality Josh Brown, CEO, Ritholz Wealth Management, noted the paper “was the most seminal thing ever written about the ways in which financial advisors can add value to a client away from the fussing over asset management. I don’t know a single serious person in our industry that hasn’t read it, shared it and internalized it.”

The 32-page report is available to read here. But we know you’re busy, so we’ve summarized it for you. Take this in — it may just transform your practice and enhance your client relationships.

Adding Value for Your Clients

Value is a subjective idea, and it’s not always quantifiable. For some investors, the peace of mind that your counsel provides is highly valuable on its own. For others, the bottom line matters most. By following the seven steps of Vanguard’s Advisor’s Alpha framework, you can combine performance with behavioral coaching to maximize your value-add.

Vanguard estimates the potential value of these practices is about 3% in net annual additional returns. That’s a significant percentage. While it’s not consistently annualized, the value emerges during key moments of stress and emotion such as market volatility or momentous life events.

Step 1: Asset Allocation

Sound asset allocation begins with a well-thought-out plan. Fully understanding your client’s financial objectives will help guide your asset allocation decisions and ensure they align with their risk tolerance, goals and time horizon. Done right, strategic asset allocation is the largest determinant of long-term portfolio success and risk management. While the exact value varies widely, it is essential for aligning portfolios with client objectives.

Step 2: Cost-Effective Implementation

This step makes intuitive sense. Minimizing investment costs through low-cost funds such as index funds or ETFs will ostensibly boost net returns. However, a higher-cost fund may generate higher gross returns, so active management should not be discounted. Overall, Vanguard has found that cost reductions can enhance net returns by around 30 basis points (bps) annually. High expenses erode returns, especially in low-yield environments, making this a critical value lever. Fund cost is certain, returns are not. Control what you can control.

Step 3: Rebalancing

As markets shift, it’s essential to regularly restore your client’s portfolio to its target asset allocation. It can be an emotionally challenging task, as rebalancing sometimes requires selling what’s working and buying what’s not. But that’s where your value comes in — the discipline you provide by ensuring the portfolio remains aligned with your client’s goals. Rebalancing can add up to 14 bps annually, primarily by managing risks and preventing risk levels from drifting too far from your client’s original preferences.

Step 4: Behavioral Coaching

The most significant source of value — potentially 100 to 200 bps — comes from helping clients avoid emotional, short-term decisions. Clients often react to market volatility by chasing returns or fleeing risk. As an advisor, you can serve as an “emotional circuit breaker,” reminding your clients to stay committed to long-term plans. Behavioral coaching is the cornerstone of the Vanguard Advisor’s Alpha. A single intervention during a market downturn can offset years of advisory fees.

See Portfolio Perspectives: Avoid Irrational Investing to Keep Goals on Track

Step 5: Asset Location

Optimizing where specific assets are held (e.g., taxable vs. tax-advantaged accounts) to minimize taxes can add value each year to your client’s portfolio. Holding tax-efficient investments, such as index funds, in taxable accounts and tax-inefficient ones, such as bonds, in tax-deferred accounts can add up to 60 bps annually. The value of this strategy compounds over time, significantly enhancing long-term returns.

See Portfolio Perspectives: Optimal Asset Location, Part I – Equities & Part II – Fixed Income

Step 6: Withdrawal Strategy

Developing a tax-efficient order for withdrawing from accounts during retirement can add up to 120 bps annually by minimizing taxes and preserving tax-deferred growth. An appropriate withdrawal strategy typically involves prioritizing required minimum distributions (RMDs), then taxable accounts, and finally tax-deferred and tax-free accounts. The order of the last two depends on whether future tax rates are expected to be higher or lower. Strategic Roth IRA conversions at lower tax brackets of tax-deferred accounts in early retirement years can add even greater value over the long-term.

Step 7: Total Return vs. Income Investing

This strategy encourages clients to consider total return, which includes both capital appreciation and income, rather than chasing high-yield investments. High-yield strategies often lead to higher risks, lower diversification and reduced tax efficiency, depending on the client. A total return approach balances diversification, risk and tax efficiency for better long-term outcomes.

A Relationship Built on Trust

Each of these strategies works best, and perhaps only, when your client trusts you. Before you begin with these steps, make sure you’ve built a sound financial plan in partnership with your client that establishes transparency and fosters open communication about what truly matters to them. Proactive communication, such as periodic check-ins, will help to nurture that relationship, discover life events or other changes that may impact their risk tolerance and build a deeper knowledge of their financial goals.

Ultimately, your clients trust you because you have their best interests at heart. And by following the Vanguard Advisor’s Alpha framework, you can transform those best interests into realized financial goals.

Invest with intention.

For more information, contact Dynamic’s Asset Management team at (877) 257-3840, ext. 4 or investmentmanagement@dynamicadvisorsolutions.com.

As Director, Asset Management, Lucas Felbel, CFP®, CIMA®, leads the implementation, monitoring and evaluation of trading activities at Dynamic Advisor Solutions.

Disclosures

For advisor use only. This commentary is provided for informational and educational purposes only. The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. This is not intended to be used as a general guide to investing, or as a source of any specific recommendation, and it makes no implied or expressed recommendations concerning the manner in which clients’ accounts should or would be handled, as appropriate strategies depend on the client’s specific objectives.

This commentary is not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. Investors should not assume that investments in any security, asset class, sector, market, or strategy discussed herein will be profitable and no representations are made that clients will be able to achieve a certain level of performance, or avoid loss.

All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Information obtained from third party resources are believed to be reliable but not guaranteed as to its accuracy or reliability. These materials do not purport to contain all the relevant information that investors may wish to consider in making investment decisions and is not intended to be a substitute for exercising independent judgment. Any statements regarding future events constitute only subjective views or beliefs, are not guarantees or projections of performance, should not be relied on, are subject to change due to a variety of factors, including fluctuating market conditions, and involve inherent risks and uncertainties, both general and specific, many of which cannot be predicted or quantified and are beyond our control. Future results could differ materially and no assurance is given that these statements or assumptions are now or will prove to be accurate or complete in any way.

Past performance is not a guarantee or a reliable indicator of future results. Investing in the markets is subject to certain risks including market, interest rate, issuer, credit and inflation risk; investments may be worth more or less than the original cost when redeemed.

To the extent that this material concerns tax matters, it is not intended to be used by a taxpayer as tax advice. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

Investment advisory services are offered through Dynamic Advisor Solutions, LLC, dba Dynamic Wealth Advisors, an SEC registered investment advisor.

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