The Worth of Sage Advice Part IV: Crunching the Numbers on Advisor “Alpha”

In our last post, “What’s Driving Your Advisor Relationship,” we discussed some of the qualitative ingredients that go into a satisfying advisor relationship. Essentials such as fiduciary duty, seasoned experience and transparent fees are critical. But qualitative assessments should also be combined with quantitative insights to yield the best recipe for success. If you doubt us, try baking a cake sometime without measuring out your baking soda or checking to see what temperature to set the oven.

But herein lies a dilemma. Many investors tend to adopt a “horse race” approach to grading their advisor’s worth, based largely on recent portfolio performance. Given how continuously volatile the markets are in the near-term, such an approach leaves them forever uncertain as to how their advisor is really measuring up over time.

In contrast, we believe the best benchmark against which to measure your advisor’s worth, or “alpha,” is this:

Advisor Alpha: In the face of life’s many uncertainties, is your advisor ensuring that your investment activities remain as optimized as they can be for helping you realize your personal, long-term financial goals?

In other words, if you were trying to manage your financial affairs and investments in the absence of your advisor, how much better or worse off would you be over time?

Understandably, it’s challenging to quantify “success,” when the definition is that broad. Fortunately, Vanguard has been researching and advancing the concept of advisor alpha for more than a decade, and has shared an overview of its findings in a report, “The added value of financial advisors.

Vanguard’s analysis looked at a trio of areas in which an advisor’s value can shine through: portfolio construction, behavioral coaching and wealth management. According to its report, an advisor “may add about 3 percentage points of value in net portfolio returns over time.” by adhering to the types of best practices we’ve been describing in this month’s “Worth of Sage Advice” series.

Of course results can vary. But given that a typical advisor fee these days is in the vicinity of 1 percent or less per year, it doesn’t take an advanced degree in mathematics to recognize that a worthy advisor relationship can be well worth exploring.

We hope this month’s series has offered some helpful guidance on how to conduct your due diligence. In fact, if you’d like us to send you a PDF version of our entire “Worth of Sage Advice” series, connect with us, and we will be happy to share that with you.

AFF-ThanksgivingSage Serendipity: From our family to yours, we wish you a warm and loving Thanksgiving.  And when the camera comes out – Say Cheese!


Sheri Iannetta Cupo, CFP®, Founding Partner (Retired) & Director
[email protected]

SAGEbroadview Wealth Management is a Fee Only firm offering ongoing financial planning and portfolio management, with tax planning woven carefully throughout our services. We work virtually across the country, with offices in Farmington, CT, Morristown, NJ, and Burlington, MA.