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A few years ago, I had a choice to make. Not a super important one, but even still it was going to affect our family’s monthly budget and was potentially going to make an important impact on our life. Should I hire a very reputable, entrepreneurial, young man and his business to mow my lawn or should I save the money and continue sacrificing the 1.5 hours by doing it myself. Of course, some of you are screaming, are you kidding me, pay $50 per week for someone to mow your lawn? Let me explain. I’m in a career where a 40-hour work week is not the norm. Many evenings are spent around the table with families helping them figure out their financial picture and plans. Thus, time with my wife and kids is precious, therefore taking another 1.5 hours a week away from them was a very important decision. Then in true financial advisor fashion, I sat down and calculated my hourly pay (because like some of you I’m paid a salary) and when figuring that out, it was actually better for me to use the hour I would have spent mowing, on work related tasks (such as my writing!) and free up more time throughout the week for my family. All in all, I was better off financially and relationally to pay someone to do a task I didn’t love! To make it better, he did a significantly better job than me on my lawn. In much the same way, you as a client or potential client, have the decision as to whether to hire a financial advisor or not. You could certainly invest yourself at a lower cost, but are you necessarily better off doing so? Or like me, does the outsourcing of something you’re not trained to do, provide you better value than the cost of that service? The purpose of this article is to help you unpack that question.

Assisting me in providing the data that I’ll provide you with, is the Vanguard Advisor Alpha Study. Alpha, according to Investopedia is defined as, “a term used in investing to describe an investment strategy’s ability to beat the market, or its “edge”. Thus, when Vanguard created the Advisor Alpha Study, which was last updated in 2019, their intention was to quantify the value they felt Financial Advisors brought, not through investment outperformance, but rather through things such as financial planning, discipline and guidance. Additionally, there are different levels of Alpha that can be created by financial advisors. It's the same reason that two cars, both with four doors and wheels, can range in price from $30,000 to $300,000. That is the reason, why we have tried to continually improve our service model, such as adding things like a CPA to our staff, to provide tax planning and preparation, an attorney to our staff to provide estate planning guidance and a Ramsey Solutions Master Coach to our staff to help with budgeting, debt paydown and other behavioral financial issues that may arise, because we want to become more like that $300,000 car, not in cost, but in value provided to you, our client or potential client.

Based on Vanguard’s analysis, through seven quantification modules, they believe Advisors can potentially add about 3% in net returns by using the Vanguard Advisor’s Alpha framework. Those seven modules, which I’ll unpack briefly below are: (1) suitable asset allocation using broadly diversified funds / ETF’s, (2) cost-effective implementation, (3) rebalancing, (4) behavioral coaching, (5) asset location, (6) spending strategy (withdrawal order) and (7) total-return versus income investing.

Suitable Asset Allocation – Vanguard Estimate of Alpha > 0*

Investopedia defines Asset Allocation as, “an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individuals’ goals, risk tolerance and investment horizon. The three main asset classes – equities, fixed income and cash – have different levels of risk and return, so each will behave differently over time. Dave Ramsey says, Money is like manure, left in one spot it can stink but spread out, it can help things grow. Spreading money out, is something many clients want to do, however have trouble executing.

We believe the asset allocation decision starts with creating a financial plan. The financial plan outlines the goal(s) of the money, thus sets proper expectations for the amount of risk that should be taken and when risk should be pulled back. This is often time consuming and tedious, thus many advisors skip it to get right to the “sales” side of investing, however that is not something we would recommend. Having a financial plan allows for less emotionally based decisions, because you can use the plan to show the impact of any market cycle on your goals and objectives and over time, short term movements in the market, while they may be scary, are not going to create major issues for your plan, should you be allocated correctly.

Additionally, within each asset class, one can see the disparity between investments in a single year, by looking at this chart from Prudential. Take for example 2002, the difference between the highest stock category (Mid Cap Value) and the lowest stock category (Small Cap Growth) was 20.62%. Or in 2021 the difference from the highest stock category (Mid Cap Value again) and the lowest stock category (Small Cap Growth again) was 25.51%. What if you weren’t properly diversified? I know many, many investors that had no Mid-Cap Value exposure because of how poorly it performed over the last ten years, yet that lack of exposure could have cost them as much as 25.51% last year.

Cost-Effective Implementation – Vanguard Estimate of Alpha > 0.34%

There is a large investment firm that uses the tag line, “we do better, when you do better.” They use this tag line because they are a fee-based advisor, so every time there is an added cost to the investor, through an unnecessary fee or commission, the portfolio doesn’t grow as well and thus the firm doesn’t get paid as much. In that way, the investor wants the account to grow through good investments and lower fees and the investment advisor wants the account to grow (so the assets they are helping the client to manage are larger) through good investments and lower fees. This is why, most blogs will tell you to look for a fee-based, fiduciary advisor, because they’ll typically be in a position to provide you with this type of service model.

This value-add has nothing to do with how the market performs (up or down) because when you pay less, whatever the market does, you’ll be in a better position. When investing non-retirement money, this value-add can be extended to reduction in tax costs as well. Investors that use Exchange Traded Funds, have the propensity to keep their costs lower and to avoid what is called the tax-drag of your mutual funds, which are the impacts of consistent capital gains on your non-retirement investment portfolio.

Rebalancing – Vanguard Estimate of Alpha > 0.26%

When selecting how aggressive or conservative an investor would like to be, an advisor would only be doing their job if they not only allocated investments consistent with that target but also then maintained that target allocation, over many years. Rebalancing helps one to do what Warren Buffet has often told us to do, which is, “buy low and sell high”.

Vanguard studied a 60% equity and 40% fixed income portfolio, from 1960 – 2017 and found that a rebalanced portfolio (rebalanced annually) provided only a marginal lower return (9.05% vs. 9.45%) with significantly lower risks (11.09% vs. 13.76%) than one that was not rebalanced. One might ask, if the non-rebalance portfolio did better in regards to return, why would I rebalance? The risk (as quantified by Standard Deviation) is similar to an 80% equity / 20% fixed income portfolio, without the return. Meaning you had the risk level of a more aggressive portfolio, without the return. Thus, if return was the most important factor, you would have been better off originally investing in an 80% equity and 20% fixed income portfolio.

As SmartVestor Pro’s we additionally believe in rebalancing the four main categories you invest in. Growth, Growth & Income, Aggressive Growth and International. These four categories have disparity in their returns (see example of Mid Cap Value and Small Cap Growth above) and rebalancing helps you to take the asset class that performed well most recently and remove the excess gains into the other three categories. Many times, over the last 20 years, the best performing asset class (growth for example) became the worst, then became the best. Rebalancing helps you to take advantage of that.

Behavioral Coaching – Vanguard Estimate of Alpha > 1.50%

Just last week I wrote about this and you can find it on our website, titled under the article, Warren Buffett-ism – Investing is Simple, Not Easy. This is especially important right now as the stock market last week entered correction territory (-10%) and the Nasdaq, mainly tech stocks, while not closing here, touched bear market territory during Thursday of last week (-20%). Human nature is a hard thing to beat and investing stresses one of the strongest parts of our human nature, emotions! The benefit your Financial Advisor has is twofold: First, they are not emotionally tied to your money, thus they won’t make emotional decisions, if they are grounded in facts and logic. Second, they want to keep you as a client, thus they are not in the business of making bad decisions. So, a Financial Advisor, who is telling you to stay put during a market downturn, is not doing so because they want to see you lose money but quite the opposite! They know, no one can and will predict stock market drops consistently and if you get out after the drop, you have to know when to get back into the market. Here is the problem: you got out after the market dropped, therefore what will be your indication of getting back in the market? Most likely after it goes back up a fair amount. What have you done? The exact opposite of good financial advice, you’ve bought high and sold low. Don’t anyone fool you – there never has and never will be anyone that can accurately predict when the market will go up and when it will go down.

Read last week’s article for a more in-depth discussion on this. But suffice to say, this is largest value add Vanguard quantified, which may mean, you can be your own worst enemy when investing. Specifically check out, how much lower self-directed clients did in the last major market crash (2008), that were trading as a result of the drop, than those who stuck to their strategy.

Asset Location – Vanguard Estimate of Alpha 0 – 0.75%

Simply where you put what assets can have an impact on the total return of your investment portfolio. Let’s assume our retired client that has a 60% equity and 40% fixed income portfolio totaling about $500,000. Of their $500,000 about $400,000 is in their IRA and the remaining amount is in their brokerage (non-retirement account). Asset location would have you put all equities, through a tax managed type of investment like ETF’s, in their brokerage and put all their fixed income and remaining equities in their IRA. This is because the income from their fixed income, if left in their brokerage would be taxed at ordinary income, whereas in the IRA it’s being paid and not being taxed (until distribution) and the growth of the equities in their brokerage account, while ultimately taxed at a capital gains tax rate, has the potential to get a higher benefit to their heirs, if they were to pass away before using the assets and allows the advisor to provide tax planning on their distributions, which could result in a 0% capital gains tax.

When Vanguard ran their estimate of allocating assets as described above vs. other scenario’s the difference was a reduction in return anywhere from 0.27% to 0.74%. As always, when dealing with taxes and tax rates, we recommend you consult your tax advisor, such as the Tax Endorsed Local Provider, at Whitaker-Myers Tax Advisors.

Withdrawal Order – Vanguard Estimate of Alpha 0 - 1.10%

A large majority of investors are retiree’s; thus, they are no longer in the accumulation phase but rather the distribution phase and how they spend their assets over their retirement years can have a big impact on their ability to make their money last and/or use it in the most efficient manner possible. One item to note is that the most value is created by someone who has used all three saving buckets at their disposal. Pre-Tax, Roth and Brokerage (Taxable) accounts. This is why we highly encourage clients to follow Baby Step 4 – (1) 401(k) up to match, (2) Roth IRA or Backdoor Roth IRA (if income is too high), (3) back to 401(k), if needed. Then for any additional savings we typically do not advocate for saving above 15% in retirement vehicles, but rather we think you should use a brokerage account (taxable) in the event you’d like to do something before retirement and/or to create a bridge if you retire prior to 59 ½.

Vanguard advocates for the following distribution method:

  1. RMD – Required Minimum Distribution for those 72 and older. This is money that is forced to come out of your account, regardless of your desire to take it, so that it can be taxed. Of note, read our article on reducing the tax on your RMD’s we wrote last month here.

  2. Dividend / Interest on Taxable Investments – Dividends and interest are taxable in the year received, so considering you’ll be taxed on this money anyway, one should consider using that for your cash flow and income needs.

  3. Retirement Accounts – This would be last asset to tap into for cash flow needs considering the fact that all this money is growing tax free. Here one would take from their Roth IRA assets if they felt like tax rates were going to be lower in the future. If they felt like tax rates were going to be higher in the future, they would use their Traditional IRA (pre-tax) first and then use their Roth IRA.

Total Return versus Income Investing – Vanguard Estimate of Alpha > 0*

With rates historically low for both fixed income and dividend rates, the value here is likely never been higher for retirees. Often times, I’ll be asked from a client why not pick a stock that has a 5% dividend yield and invest in that company to generate the needed cash flow for their retirement. While I haven’t been around forever, I’ve been in this business for two decades almost, and I’ve seen two things happen that disrupted people’s retirements (notably not people I’ve worked with). Bankruptcy and dividend cuts. My father retired from General Motors and many of his co-workers had their entire retirement in General Motors stock. Of course, GM filed for bankruptcy in 2009 because they had $82 billion in assets and $172 billion debt. Just last week AT&T cut its dividend from 7% in half to about 4.7%. Even with the dividend payment the net return on the stock over the last five years has been negative 4.25% per year (as of 2/25/2022). Other ways clients have tried to juice up their income from a portfolio, have been investing in long term bonds, which will provide higher yields but will have a much higher drawdown when rates rise. Additionally, junk bonds have been a popular investment vehicle because the poor credit quality of the issuer, necessitates a higher income payment to the investor, however these investments tend to act like stock in periods of market disruption, completely missing the point of the fixed income portion of the portfolio.

Most intelligent advisors advocate for a total return type investing strategy. All the above strategies tend to do is increase the risk of the portfolio, creating a higher probability long term goals will not be achieved. Total return investing typically provides the following benefits to the investor: (1) less risk because of better diversification, (2) better tax efficiency especially for those who have taxable and tax-free accounts and (3) a potentially longer lifespan for the portfolio.


Hiring a financial advisor is not something that should be taken lightly. One should consider the range of capabilities their advisor and the advisory firm supporting them, can provide and their desire to help teach you the ways they can add value to your unique and specific situation. We are honored that you have chosen use to serve you, if you’re an existing client and we look forward to a conversation about how we can do so, if you’re a prospective client.


March 1, 2022

John-Mark Young

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