A look at how advisors build a plan

Getting to know the client is key to developing the right investment plan. Kevin E. Miller, CFP®, of Vanguard Personal Advisor Services®, and Don Bennyhoff, CFA, of Vanguard Investment Strategy Group, explain how advisors focus on a client’s unique financial situation to create a custom-tailored financial plan.

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Gary Gamma: Okay. Another live question. Katharine asks, “With so many funds, how do advisors go about choosing the right funds for a client?” How would you respond to her on that?

Kevin Miller: Sure. So, a lot of it is dependent upon their situation and going back to when we were talking about goals-based investing. So, talking about what exactly is it that you’re trying to accomplish, and sometimes people will come in with some notion about, you know, here are some funds that I’m familiar with. These are funds that my friend told me about that I think I should be in, but maybe they’re significantly riskier than what you’re looking for. You know, typically we tend to go with a very broad-based indexed approach because we want to give you broad diversification, very tax-efficient, and at low cost.

And then, I think one of the misconceptions is that, you know, we’re only going to recommend those funds, and if you have anything else, especially if assets are transferring from other institutions, that we were just going to tell you to sell everything.

And, in a lot of cases, we can work around positions that you have, even if they’re not Vanguard-specific if it makes sense to hold onto them because, otherwise, you’d incur a large capital gain or something like that. So, you know, we do have some flexibility in that area. So, everyone’s, you know, situations are a little unique and we can try to come up with a solution that fits them.

Gary Gamma: We have another question here. Historically, there is no data for actively managed funds performing any better than passive funds. How do you justify the worth of active? And that’s not a plant so, obviously, Vanguard definitely sees the benefits of index funds. Do you see those questions coming up? People asking is there really a benefit to active management these days?

Kevin Miller: I see it and, you know, there are funds that will outperform in certain time periods; the difficulty is trying to identify those ahead of time, which is one of the reasons why we tend to recommend a lot of index funds. But, you know, again, we can integrate them into the portfolio if it’s a client preference. If they have some percentage in actively managed funds or, you know, if it’s something that they already own that they want to try to hold onto because of they like the position or it’s something that they have tax implications or something like that.

Gary Gamma: Don, Rick from Massachusetts asked, “How important is their investment performance to an advisor’s relationship with his or her clients?”

Don Bennyhoff: I’m going to rephrase the question. I think it’s about in terms of the relationship; how much of the relationship between an advisor and client is affected by their investment return. I think it can be. I think it’s up to the investor to really figure that out. Some of the research that we’ve done on investors and how they hired advisors and how they value advisors. Some people are, they’re performance-driven. And that can be a bit tough because as the research that we talked about before noted that outperforming on a regular routine basis, using active management to get, which is really required, to get higher returns than the market benchmark that you’re shooting for, you have to look different than the market benchmark, and that means you have to tinker with the portfolio using market-timing or security selection.

It’s a tough job because there are so many people out there doing it and they have the same expertise and a lot of the same tools and backgrounds as the people competing for us. One of the things that we do have at our disposal and what the academic research has also shown is that while past performance is not a good predictor of future outperformance, the relative cost of an active fund or an index fund, for that matter, is. So, there’s a relationship between lower-cost active funds and future outperformance. To Kevin’s point, it doesn’t guarantee that a fund is going to outperform year after year, every year for the going future. But it means that more or less they have a lower hurdle for outperformance than do their higher-cost active peers.

Gary Gamma: Kevin, how often do you get clients calling and saying there are other funds that are doing better, and how do you respond there?

Kevin Miller: I get it a lot actually, and I’m sure it’s probably not that hard to believe but, you know, again, it goes back to I think part of it having that plan and what is it that you’re trying to accomplish and how are you getting there? And swapping out a fund, whether it’s something that’s sector-specific or just happens to be high-flying for right now, again, it’s no guarantee that’ll persist over time. And, you know, what we were talking before about performance and having those conversations, it works I think in both good times and bad. Now, when I check in with clients, we generally check in twice per year at a minimum with them, having discussions around and setting proper expectations that markets have done fairly well.

But they won’t always persist. So, getting them not used to these types of returns, as well as also reinforcing that here’s how Vanguard will respond when the market’s inevitable, you know, not really so much if, but when the markets go down, here’s what we’re going to do so that they’re not blindsided by that. They go okay, yes, I talked to Kevin, I already know about this and it just reduces a lot of the stress that goes along with investing.

Important information

All investing is subject to risk, including possible loss of money you invest. Diversification does not ensure a profit or protect against a loss.

Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.

This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.

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