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Gary Gamma: Hi, and welcome to our live webcast. I’m Gary Gamma. Tonight, we’re going to explore the value of a financial advisor and how advice might help you achieve your goals. Joining us are two experts on this topic, Don Bennyhoff, senior investment strategist, and Kevin Miller, a Certified Financial Planner® Professional with Vanguard Personal Advisor Services®. Thanks to both of you for being here. Appreciate it.

Two items I’d like to point out: There’s a widget at the bottom of your screen for accessing technical help. It’s the blue widget on the left, and if you’d like to read some of Vanguard’s thought leadership material on tonight’s topic or view replays of past webcasts, click on the green and white resource widget on the far right of the player.

Now, we’ll spend most of our webcast answering your questions today. But first, just a few days ago, we went outside the walls of Vanguard to see what people thought about financial advice. Let’s hear what they had to say.

Talli Sperry: We’re here at a local farmers market where we’ve come to ask people some questions about financial advice. So, tell me, are you saving for retirement?

Male: Yes. I am, yes.

Female: Sort of.

Talli Sperry: How confident are you that your retirement savings are invested appropriately?

Female: I’d say about 75%.

Male: I’m very confident. I have a trusted advisor who’s a cousin-in-law, and also, I learned from him. I used to work for him.

Talli Sperry: Have you ever thought about asking anyone for financial advice?

Male: Yes.

Female: Yes, considered it.

Talli Sperry: What do you think the benefits might be?

Male: Well, you have to, first of all, listen to somebody else besides your own heart because sometimes what we want to do is not necessarily the best advice.

Female: Well, I can’t keep up with everything that’s going on. I can only read so much, I only have so much time, and so, I feel somebody ‘who that’s their full-time job that they’re going to know something. So, if I have a question, I can always go to them for that.

Talli Sperry: And what would you look for in a financial advisor?

Female: I think I would want to know if what we’re doing is the right path.

Male: A personal relationship.

Talli Sperry: That’s great. That’s wonderful. A lot of interesting perspectives on the benefits of financial advice. Back to you, Gary.

Gary Gamma: Thanks, Talli. Well, that was interesting. I liked when the— They asked, “Are you saving enough?” And the wife looked at her husband and said, “Sort of.” Guys, what did you think about that? Kevin?

Kevin Miller: I thought it was really interesting that the part that really struck me was the gentleman there at the end where he talked about the emotional part of it and making sure that you’re staying on path over time.

Don Bennyhoff: Great. A big part of this is what people are looking to get out of the relationship. I heard something sort of repeated in a couple of different spots. Something we refer to as TWA, sort of—a lot of people don’t have either the time or the willingness or the ability to really manage their money. Maybe they are looking for some help with that, and I think that seems to be a common denominator for people looking for advice.

Gary Gamma: Yes, a lot of people want a second opinion, and I’m sure we’re going to talk more about that. Now that we’ve heard from those folks, however, we’d like to hear from you. On the screen, you should see our first poll question, which is, “What is the primary benefit that you want from a financial advisor? Positive investment returns for my portfolio, rapid portfolio adjustments in response to market and economic changes, behavioral coaching on how to best achieve my financial goals, or frequent consultations?” Take a moment, answer, and we’ll get to those responses in a moment.

So, Don while we’re waiting for that, why don’t we jump in and take our first question. We have Gail from Colorado who says, “What are the criteria for needing a financial advisor?”

Don Bennyhoff: I think the interesting word there is need. I’m not sure if people need an advisor, but I think a lot of people can benefit from one. A lot of people feel comfortable investing on their own and handling their own investments. Maybe they have the discipline, they have the awareness of how they would want to invest for their future goals and objectives. But a lot of people don’t really feel comfortable doing that or maybe not want to do it alone. Maybe they’re looking for a partner. So, I don’t think anyone really needs it, but I do think there are some signals that maybe having a consultation with an advisor could be beneficial. Sort of what I refer to as TWA could be a good starting, you know, a good starting point. You know, you feel like you don’t have the time to do it or just don’t want to take the time to do it.

Maybe you want to use the time that you have to do what you do best. Run your business, or see your patients, or enjoy retirement. Maybe it’s just, you know, an aspect where you’d rather do something other than worry about your finances and find a trusted advisor that can help you with that.

Gary Gamma: Right. So, thinking about that, Kevin, Karen from Hawaii said, “What questions should you ask potential advisors in order to make your selection?” So, if somebody does come to that conclusion that they want one, what are those questions?

Kevin Miller: Absolutely. I think you can look at it in a— From a couple of different areas so looking at the individual themselves. What’s their background? What sort of licenses or certifications do they hold? Asking about how are they compensated? You always want to make sure that sort of their interests are aligned with yours as the investor. Taking a look at methodology. So, exactly how is it that they manage the assets? Are they someone who trades a lot or doesn’t trade very frequently? You should be familiar with what to expect with that, and then, along with the products that they use. Are they going to use individual securities, like individual stocks? Do they use mutual funds, ETFs, or something else? So, I think, you know, getting a better sense of exactly if you decide to partner with them, what does that relationship look like over time?

Gary Gamma: Yes. Well, we got some poll results now, so, again, we said, “What is the primary benefit that you would hope to gain from a financial advisor?” About 53% said a positive investment return for my portfolio. The second most popular answer was 33% saying behavioral coaching on how to best achieve my financial goals, and then, small amounts on the other. So, does that surprise you, those results?

Don Bennyhoff: Not necessarily. I mean, I think a lot of people sort of associate going to an advisor for their investment acumen. Their portfolio management skills—I think a lot of people don’t think about the other value that they may bring to the table and it could be the professional discipline and their experience in the markets so that this is—Maybe this isn’t their first rodeo. They, you know, can help work with the clients to help them see what they need to do to be successful as investors. Everyone wants a positive return; that’s certainly why we invest. But really when I think that the advisors can pay the biggest dividends is where we don’t get positive returns. At those periods in time, that’s when the behavioral coaching can help keep someone from making a—Hopefully, a momentary loss a permanent one.

Gary Gamma: Yes.

Kevin Miller: And I would agree. The conversations that I have with clients on a daily basis, it’s, you know, sometimes they think well, I’ll engage with an advisor when the market’s down. But even in periods when the market’s up, you can have pockets of volatility along the way that will cause clients to maybe want to make decisions that aren’t in their best interest long-term. So, even when things are going good, you know, there can definitely be some added benefit there.

Gary Gamma: Do you get a lot of calls when the market’s up?

Kevin Miller: Yes.

Gary Gamma: Okay. Well, we’d like to ask the audience another poll question. “Do you have a written investment plan? Yes; no, but I plan to complete one soon. No, and I don’t know how to get started.” Think about that, give an answer, and we’ll check in on that in a moment. So, let’s take another pre-submitted question here. Another Karen in Wisconsin talks about what credentials should a financial advisor have such as Certified Financial Planner, etc., and why a particular certification or training? So, kind of a follow-up to the last question. “Do I need an advisor, maybe I do? What am I looking for there?”

Don Bennyhoff: Well, I can probably start us— Kevin, to add on. So, I think probably the one that’s most useful for someone looking for financial planning would be this certified financial planning designation. Myself, I’m a CFA® charterholder, which covers a lot of the same ground, but it tends to be a bit more about asset management or portfolio management. I think the CFP tends to spend a bit more time on things like tax planning and estate planning. Some other things that I think a lot of people can benefit from, and it’s an area where an advisor can add value. But I would emphasize the CFP from that angle but, what do you think?

Kevin Miller: Absolutely. Yes, the advisors of Vanguard are Certified Financial Planners when you’re working with a dedicated advisor and, you know, we have a broad background in different areas beyond just typical investment planning.

Gary Gamma: Okay so, we’ve got more poll results. “Do you have a written investment plan?” Thirty-six percent said yes. Thirteen percent said no, but they want to complete one, and 50% said no, and they don’t know how to get started. So, what will we say to that 50% that isn’t sure what to get started in; maybe even on a broader question, what’s the importance of a written investment plan?

Don Bennyhoff: Yes, I think a big part of is I talk to a lot of clients that are really close to retirement and they’ve sort of already mapped out a date of when they would think about retirement, but they haven’t really thought through what does retirement look like? What sort of expenses will I have, and if anything, going through that process gives them some time to sort of think about what retirement looks like, you know, and it can be very different from someone that wants to spend time volunteering in their community versus the person that wants to travel around the world. You know, very big difference cost-wise, and so, having that plan gives you an opportunity to sort of think through all those areas, and then, how am I doing versus those goals and will I be able to meet those?

Kevin Miller: Yes, I would agree that— I think one thing I would add to that is I think people tend to associate a financial plan with something really big and complicated. And it can be if your situation really would require it. And we tend to find that with older individuals that they’re starting to consider other aspects of, you know, retirement and legacy and estate planning, and things like that. But I think a financial plan doesn’t have to be terribly complicated, and it could be just as useful for a younger investor that’s getting started.

It doesn’t have to be some big written expensive thing, but it could be a strategy that says, “What am I investing towards and how am I going to get there?” The important thing is I think that it’s done before you sort of get financially and emotionally committed to the portfolio so that you don’t try to justify things in arrears because you didn’t do enough homework at the beginning. It’s sort of like, you know, laying out that blueprint for the building before you build—buy the building materials. It just makes sense to try and do your best to figure out where you’re going and how best to get there. And it can be pretty straightforward.

Gary Gamma: And there’s probably no right age to do this, right? I know we got a lot of questions that talked about age. One that we have here was from Ellen in Minnesota, who says, “Is there a specific age when someone should start thinking about getting a financial advisor?”

Don Bennyhoff: Absolutely. I talk to advisors, and they cover really a wide range of ages. So, for someone that’s young, the benefits can be tremendous. By starting early, the benefits of compounding over a long period of time and just sort of thinking about investing versus, you know, even a ten-year difference can make a huge world of difference versus the person that’s really close to retirement, figuring out “Am I where I need to be and what changes can I make? Do I need to save more? Do I need to work longer?” And then, for someone that’s in retirement, “How do I convert the lump sum that I’ve been able to save over the years; how do I make that a stream of income that I can then spend from?”

Historically, people have done a fairly good job about saving assets, but a little less sure about then, how do I spend down from that in a really efficient way, and making sure that it lasts? So, you know, I think across all ages there can be big benefits.

Gary Gamma: So, you talked a lot about the people you speak to on a daily basis. We have a live question from Sara, who says, I don’t want someone to “manage” my money, but I have occasional questions. I’d like to ask someone, and I do want them to look at all of my accounts. So, what would you say to Sara?

Kevin Miller: Sure, so at Vanguard I talk to clients that, you know, feel comfortable managing the assets on their own, and sometimes they want to look at the portfolio more broadly. Make sure that their asset allocation is correct. Other times, it’s about a specific question or a specific part of the portfolio so, you know, we do both there—’if you feel comfortable and you’re doing the right things in the portfolio, you can have that conversation on a onetime basis.

Gary Gamma: It sounds a lot like the people in the video. They just want someone to check it out and make sure they’re on the right path.

Kevin Miller: Exactly.

Gary Gamma: Yes. Don, we had a question from Gregg in Tennessee. With Vanguard’s buy-and-hold philosophy known, why add an advisor to the mix?

Don Bennyhoff: Yes, it’s funny. We get a lot that question a lot. I do think that there is a misconception that buy and hold means that there’s nothing more to do. Like, once you’ve established the plan and the investment strategy to try and meet your goals that nothing more is really needed. And I do think that that’s an overstatement. Certainly, if you go to all the trouble of choosing an asset allocation that might help you meet your goals, your savings targets or your contributions so that you can contribute to your wealth in the future to really do your part investing as a partnership between you providing the capital and the markets providing the return on capital.

Rebalancing—a very difficult thing to do, but needs to be done to maintain your risk, you know, your risk and reward through your asset allocation. Even just adapt to changes in your circumstance as you age; you’re going to have certain life events that should trigger maybe rethinking of your strategy.

Maybe it’s the birth of a child, and then you need to start thinking about college tuition or, you know, ‘maybe you need a first home, or as you start to approach retirement, you start to pay more attention to getting things set up for when your portfolio has to provide the income, not your employment. So, throughout that relationship, you know, there’s a lot of things that change. Even if your investment strategy, that buy and hold, so to speak, doesn’t.

Gary Gamma: So, we have this question I think coming up. We got a lot of questions about this, but it just came in as a live question, and we love the live questions. So, we’ll go ahead and take it now. But Matt asks, “How do I know whether or not a financial advisor is really looking out for my interests?”

Kevin Miller: I think sort of looking at, you know, again, sort of compensation structure, you know, are they someone that’s just selling a product versus someone that’s really taking the time to look at your specific situation. What goals do you have? And, you know, are they going to help you get there versus, you know, I sell a particular product and that’s always what I’m going to go with versus what’s necessarily right for you.

Gary Gamma: So, it seems like those might be some questions you would ask up front. What does your compensation structure look like to help answer that question down the road?

Don Bennyhoff: Yes, it’s actually a very important question; ‘a lot of people have heard about the Department of Labor fiduciary rules and what’s going on in Washington as that sorts out because there are certain advisors that are obligated under their licenses to act as a fiduciary and always put the client’s interest first. Others are still compensated under a suitability standard. They tend to be compensated through commissions and sort of the more traditional advice model where you pay for transactions. They’re actually under a suitability standard, which means that the recommendations just need to be suitable. So, asking somebody up front about, you know, are you acting as a fiduciary or do you act as a fiduciary or not? It can tell you a lot about where their interests are aligned with yours.

Gary Gamma: Yes. Susan from Minnesota wants to understand better the role, scope, focus, and value added by a financial advisor. You want to give her the 30,000-foot overview there?

Don Bennyhoff: Sure. I think it encapsulates some of this. I’ll ask Kevin to finish what I forget. So, part of the role and scope I think we just covered it: Is your role as a fiduciary or not? I think there are some other things that we’ve talked about in terms of are you looking for somebody to be an ongoing advisor or are you just looking for maybe a onetime consultation here or there, like a financial checkup?

In terms of the value that the advisor can bring to the table, some of it’s going to be through their experience and discipline, some of it’s going to be through their knowledge, their investment knowledge. Maybe they can help you select investments that provide a more tax-efficient portfolio or if you’re in— Happen to be retired and drawing from your portfolio spending, maybe they can help you find some ways to spend from your portfolio more tax efficiently so your assets last longer. All these things are kind of hard to quantify; they don’t show up on your performance statement. But there’s certainly ways that advisors can use either their experience or their knowledge to help you gain value even if it’s not through the portfolio management per se.

Gary Gamma: So, there’s real benefit, they’re not just—While you’re saving and investing, but when you’re in retirement as well.

Don Bennyhoff: There’s a lot of opportunities and it’s a lifetime. It is, you know, where we hope is that it’s a relationship. We do believe that advice is more of a relationship business, about relationships than it is about portfolios.

Gary Gamma: You want to add a little bit to this that somebody that does it every day?

Kevin Miller: Yes, absolutely. So, I think one of the big reasons why someone elects to sign up for this in a lot of cases, they might feel comfortable with it, but looking towards my spouse, if God forbid if something were to happen to me, I handle all this and wanting to get something set up so that their spouse is number one, familiar with who they would be working with, as well as giving us an opportunity to know about their situation, what’s important to their family, what values do they have, how does this money get passed along to future generations? And that’s something that we may not see for years down the road, but it’s really important to clients.

Gary Gamma: Don, you mentioned fiduciary role so, Joe has just submitted a live question. “Do Vanguard financial advisors have a fiduciary responsibility?”

Don Bennyhoff: To my knowledge, correct. It’s, you know, it’s part and parcel with our approach. I think ‘it shouldn’t be surprising given our Vanguard mission statement to do right by all clients. So, yes.

Gary Gamma: So, yes, I think we’re getting similar questions here, but Pollyann from Pennsylvania said, “What services do Vanguard advisors offer to Vanguard clients?” Kevin, can you talk a little bit about that?

Kevin Miller: Sure. So, if for someone that is engaging in an ongoing relationship with Vanguard, we would help them from the beginning figuring out, you know, what their goals are. Really what we do is ‘goals-based investing; they’re trying to figure out what it is that you’re trying to accomplish with this money, and then, coming up with a plan to help them get there. Helping them implement the plan, which can be a big challenge for people and actually making changes, especially if these are things that you’ve held onto for a really long time. And then, doing the monitoring, you know, rebalancing on a periodic basis when necessary. And then, you know, really being a resource for them on any number of different topics whether it’s, you know, withdrawal strategies or something that’s even ancillary to the investments themselves. Like, “When do I take Social Security; how can you help me with estate planning?” All those types of things.

Gary Gamma: So, this is a topic that I think is becoming popular; I know I hear it as I travel. I’m sure you’re hearing it as well. Spenser from California says, “How are you better than a robo advisor?” Don, you want to take that one, maybe start out kind of describing what a robo advisor is in case the audience doesn’t know?

Don Bennyhoff: Well, I can— How about if I provide my definition? There are multiple definitions out there. There’s a lot of technology providers that are providing advice in what they consider robo. So, there’s not necessarily a traditional human advisor in the mix. Many things about advice can be automated, you know: having people answer a risk questionnaire that may help them gauge an asset allocation and a savings plan to get them to a goal down the line, automated rebalancing and the like. Those tend to be considered robos.

With ours, because we have people like Kevin, we actually don’t think about it as robo, it’s more of a hybrid model where we lean heavily on technology to allow us to gain efficiencies to offer advice at a low cost. But you have the added dimension of a personal advisor or an advisor you can talk to like Kevin that can actually help when, as Kevin mentioned, things happen and people want to have a conversation; they just don’t want to check a website and try and learn something through their educational material or deal with, you know, some sort of a tweet or something like that.

So, in my view, better is certainly subjective. I think we’re different from the standpoint that we incorporate not only the technology to gain the efficiencies and low costs, but we also provide for the same cost, the human element to be able to help provide that guidance and maybe just be an emotional circuit breaker when either good stuff happens or bad.

In the late ’90s, we had a lot of people that were looking to abandon well-diversified portfolios and just in favor of the tech and telecom kind of stocks. So, it’s not just a global financial crisis–type of opportunity to have that conversation. Sometimes, when the market’s going particularly well, people want to deviate from their portfolios too, and that’s when somebody to help remind them what they’re investing for and why is a huge value-add.

Gary Gamma: Yes. Kevin, I think we got this live question earlier that kind of answered this, but just to put an exclamation point to it. Ariel from New York had written in and said, “Can I just get advice without handing over the entire portfolio?” So, I know you answered that, but maybe just hit that again. Yes, that’s part of the service if that’s what you’re looking for.

Kevin Miller: Absolutely. Yes, so, for primarily Voyager Select and Flagship clients at Vanguard, you have access to an advisor generally on sort of an as-needed basis. You can schedule an appointment, and again, you know, it can be for, let’s review the overall portfolio or, you know, I have a question about a particular piece of it and, you know, even things that seem relatively simple. And I’ll give you an example, I had a conversation with a client recently that he had a fund in the portfolio and he wanted to exchange out of it. He already knew what fund he wanted to go into and he more or less just wanted a check on that. And we talked about it and the fund that he wanted to go into was in a taxable account, and the fund was actively managed so, there are some potential future tax implications of that.

This gentleman also owned an IRA, and so, we talked about well, why don’t you put the new fund in the IRA where it’s more tax-efficient? And then, we’ll put something that’s more tax-efficient in the taxable account so the net result was the same. He sold what he wanted to sell, he bought what he wanted to buy, but we didn’t do it in the same account, and so, that 30-minute conversation could have a big impact for him long-term because the amount that he moved wasn’t insignificant so, if we’re able to save him from some tax liability going forward, you know, that’s something where even when people are pretty sure about what they’re doing, you know, having a conversation with an advisor can pay a big dividend later on.

Gary Gamma: Yes, that’s a great story. So, I think we’ve established the value of the service here, the benefits to the individual’s cost. We had a lot of questions on fees. The first one we have here is from Maryann in Michigan: “What are the associated fees for financial advising?”

Kevin Miller: Sure. So, at Vanguard it’s really straightforward. The cost for the service is 0.3% per year on any assets under management.

Gary Gamma: So, a third of 1%.

Kevin Miller: Yes, correct.

Don Bennyhoff: And that’s relative to the industry where typically what we’ve seen is that if you were to asset-weight it, so you just look at the average fee that for a dollar advised by investors, it comes in a little bit more than 1%. So, there’s a wide range of fees for a wide range of services that the robos tend to be on the low end because they don’t provide as much personalization or sophistication as maybe a wealth manager might who would include things like estate planning and maybe some more in-depth financial planning. So, there’s a wide range so, it is an important question going back to sort of the questions you might ask because it’s not consistent from one firm to another, and there’s a pretty wide range, and you need to make sure you’re actually getting the services that you think you’re paying for.

Gary Gamma: So, on that point, Don, Ronald from Ohio gave us a nice curveball. “Could the cost of an advisor outweigh any gains?” What’s your thought on that one?

Don Bennyhoff: I’d say absolutely. I think maybe to use a little different analogy, if you look at Vanguard, we had a question earlier about sort of being buy and hold, and I know we often are sort of considered the pillar of indexing. But we offer actively managed funds as well, and the common denominator—We’re not anti-active or pro-index, it’s we’re anti-high-cost, and the common denominator is lower cost. And I think the same with advice, you know, I think advisors, even advisors charging more than we do, can add value. There’s a lot of things that they can do to help on with a lot of estate planning and tax planning, and things like that, a bit more sophisticated, in-depth things, insurance-oriented that may be able to add some opportunities, but you just need to be sure that you’re paying for what you need.

To use our example earlier, somebody who’s just looking to maybe get started, who really just needs a good asset allocation, a good savings strategy, and a good rebalancing strategy might be able to get something like that for far less than 1% because the 1% may not necessarily be what they need to pay because of what was included in the 1% is all these services that may be sort of what they may need down the line. Hopefully, they do, but maybe not at that point. So, you just want to align what you’re looking for with what you’re paying.

Gary Gamma: Yes. So, we talked a lot about adding value. Girish from Colorado says, “Is there evidence that a financial advisor is worth the money?” What’s our position on that?

Don Bennyhoff: Well, I think again, where value is kind of subjective. I think there’s a lot of people I know feel that their financial advisors, not just Vanguard, are delivering value. They’re very happy with working with it because maybe they’re taking some of the worries out of it for them. They trust them, they’ve established a relationship, they know that the advisor is looking after their interests, and that makes them feel better. It gives them an emotional benefit that may not necessarily show up in higher returns. But it’s a value nonetheless. I like to associate it with there’s a lot of four-door cars out there that are $30,000, and there’s a lot at $300,000. It’s not my place to be able to say the $300,000 car isn’t worth it. Whoever buys the $300,000 car decides it is because it meets their needs, and that’s why we have choice out there.

But I do think it is about trying to make sure that your choice for advisors and the choice of the fee that you pay for advice is aligned with the services you expect you need at that point in time.

Gary Gamma: Yes, we used to say, “What’s it worth to sleep better at night?” And so, it’s going to be different for everyone depending on their time, willingness, and ability, right?

Kevin Miller: Absolutely. Yes, I was just going to add ‘that the time, willingness, and ability comes into a lot of clients that I talk to on a daily basis, and, you know, they tell me that they have interests. I hear a lot from retirees that I’m busier now than when I was working, and, you know, for them, they’re not concerned about the mechanics of how the portfolio’s being managed; they want to make sure that X number of dollars ends up in their bank account every month. And, as long as that’s done, you know, they’re happy with that so, you know, it frees them up to enjoy the things that are really important to them and not have to focus on the things that maybe they don’t get any enjoyment out of or maybe not be as good at.

Gary Gamma: Yes. So, Kevin, you mentioned the one-third of 1% fee. Nabilla just submitted a live question. Do you need to have a certain amount of money in your portfolio to get the financial advice at that fee?

Kevin Miller: The 0.3% cost covers any advisor at Vanguard for between $50,000 is the minimum that we will manage all the way up to $5 million. So, you know, it covers a wide range of client need there.

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.

Gary Gamma: Yes. Another live question. Randy asks, “Tax law changes can make last year’s financial advice no longer wise. How long does it normally take a financial advisor to get up to speed on that?”

Don Bennyhoff: At least in my experience, and I’ve been in the industry over 25 years, there have been very few tax laws that have had major implications for investors where, all of a sudden, something that looked like a great investment one year is not a good investment the next. I think I probably would have to sort of relate to some of the tax law changes in the latter part of the ’80s in regards to the limited partnership and how ‘their gains and losses were treated with probably the only thing I can think of. But it’s been a long time. I don’t think they’re very common, but there are tax law changes along the way, and good advisors are staying up on that.

But I think the good or silver lining part of the story is that the policy makers themselves are aware that they really don’t want to, all of a sudden, turn the markets on the head. That’s not good for investors. And so the changes tend to be a bit more modest than sort of groundbreaking or monumental.

Gary Gamma: Yes. Another live question: “Why do you recommend international funds? International has not performed well at all as of late.” Obviously, we can’t give advice in this setting, but how are the discussions going these days with domestic versus international investing?

Kevin Miller: Yes, it’s something that’s always I think in front of ‘investors’ minds as far as why international, and there are different reasons, you know, if U.S. companies have a large presence outside the U.S. You know, does that count as international? And it really goes back to diversification; there will be periods where international will outperform the U.S., and it can flip back and forth on a regular basis or it could extend for a period of time. But the key is you don’t know in advance when that’ll happen, so you want to make sure you’re diversified. You have exposure to those various parts so that regardless of what does well, you’re already allocated in those areas.

Don Bennyhoff: And it’s important because the lessons that we’ve brought in from experience in the industry in dealing with this, the latter part of the ’90s I mentioned was sort of one-directional for one group of stocks that did much better than others. Even, you know, so it was basically the large-growth category did terrifically. And other categories did extremely well. Things like either large-cap value or value stocks, small-cap stocks, international—they didn’t do poorly, they just didn’t do as well, and many people tried to get concentrated in those tech stocks. But we all know, starting in 2000 and the first bear market of the 2000s, all those things that didn’t do relatively well in that last five-year period of the ’90s actually were the outperformers.

We own them all because we recommended a diversified portfolio, so we didn’t have to get involved in the timing aspect of it. Diversification and asset allocation are the best risk management tools for dealing with uncertainty, so being diversified means you don’t— You’re never going to be 100% right from the standpoint of only owning the best performers. But you’re never going to be 100% wrong either.

Gary Gamma: Yes. Kevin, I think your work as an advisor is popular here. We have a question from Tim, who says, “There’s a lot of talk about funds. What if I want to be involved with individual stocks? Does Vanguard handle those as well?”

Kevin Miller: To a degree. So, we don’t do any sort of individual security analysis, so we’re not going to give you, you know, a thumbs-up, thumbs-down on any individual position. Where we generally tend to get more involved is when somebody already owns them in the portfolio. And again, because of, you know, large capital gain, or again, it’s maybe the company that they work for and they have company stock, and they want to continue to hold onto it. But we do have guardrails in place that ‘limits how much individual stock exposure, whether it’s individual stocks collectively or any one individual stock to make sure that it’s not tilting the portfolio and they’re not taking on increased risk, that the future returns of the portfolio are really predicated on how well this one stock does. So, to some degree we can, but it’s not a focus of what we do.

Gary Gamma: Both of you may want to weigh in on this live question. How often do you run into investors or clients who do not really understand their risk tolerance? How do you help them gain insight into their true appetite for risk? A lot of questions to ask investors, I’m sure.

Kevin Miller: Yes, I actually have an example. This was fairly recently talking to a client and the question was around, “Here’s the allocation that I’ve used up to this point.” Given that the market’s done really well, normally I would get pretty close to the point where I would have to rebalance. What if we elect to go further and let’s change the target, which really you’re taking on more risk at that point. And then, in the same conversation, we talked about what we had discussed before with regards to, you know, do you know how Vanguard is going to respond if the market goes down? And the response wasn’t nearly as positive around, you know, their thought was we’d want to get more conservative at that point, and that’s the entire reason why we want to help you figure out an allocation that fits to your risk tolerance, so that you’re not forced to— You’re not taking on too much risk when the market’s doing great and then not forced to make changes when the market starts to turn. And yes, you see it a lot with clients.

Don Bennyhoff: And I think it’s a real challenge. It’s, you know, it’s understandable that people have a hard time kind of figuring out risk because risk doesn’t have one definition. I think working with someone, having that conversation that we can talk about risk of loss and maybe by not talking about it in percentage terms. Twenty percent doesn’t really sound— It’s kind of hard to get your arms around it; it doesn’t sound very big, but, losing $20,000 or $200,000 might make it a bit more relatable because you can mentally think about all the things that you could have done or purchased or how much extra— How many extra years of retirement income could that money have provided you if you hadn’t lost it. The main thing is that risk is usually associated with uncertainty, and that’s where I think through the conversation and trying to help people kind of get the understanding that when you’re investing, you’re actually bearing risk to try and get return.

It comes with the territory, but the investor controls sort of how much risk. That uncertainty means from time to time the markets can sometimes deliver much greater than expected losses, just like they can deliver much greater than expected gains. But how you respond to that can actually be the true risk because if you were to deviate from your strategy, thinking that, you know, so, in 2009 in the beginning, a lot of people were tired of seeing their money continue to lose day after day.

And when it reached 30 or 40 or 50%, some were ready to pull the plug, and we all know that that was sort of right when the bottom was. Having someone to talk to that maybe could go in and say, you know, maybe this isn’t such a good idea to react to the headlines in the market. Maybe this is a time to rebalance, not a time to bail. That type of thing can actually be a great way to help with the risk because it is uncertainty.

Gary Gamma: And obviously, this constitutes risk tolerance, which is very important because as Jim asks, “Will an advisor suggest portfolio adjustments based on my risk tolerance?” Obviously, that’s a big reason why you’re asking these questions.

Kevin Miller: Absolutely, yes. So, we spend some time not only initially determining what’s the appropriate risk tolerance for you based on how much risk you’re comfortable with, but the time horizon, and, again, the specific goal that you have in making sure that they match up to one another. And then, not so much adjusting over time, although it can happen especially for someone who’s younger and who’s working towards retirement if they have a decent amount of time left. Generally, the thought is you want to get more conservative over time, and it’s not just “I’m here one day and I retire and I’m going to have this big shift.” Generally, a more gradual change, and we can help with that as well.

Gary Gamma: Don, David from Texas says, “Since I’ve been with Vanguard for something like 30 years, I have a bunch of funds. Can an advisor help me streamline them?” So, thanks to a 30-year investor. What would you say there?

Don Bennyhoff: Absolutely. We appreciate your confidence. Absolutely, I mean I think that’s a big part of what advisors are able to do. That’s not to go in as Kevin mentioned and just sell funds that aren’t within our sort of— The funds we would typically use without considering the tax implications or other costs that might be associated with it. So, they can do it, but they can also do it very thoughtfully, and that it may not be done overnight. It might be done over time. Would you agree?

Kevin Miller: Absolutely, and ‘it comes up with clients, and again, it’s something that they may work out over time, or just helping them see that occasionally, sometimes investors will confuse the amount of funds that they have with diversification. So, you can end up holding five funds, but they’re all covering similar parts of the market. So, there can sometimes be ways to cut that down and you’re in no worse-off shape, but you’ve dramatically reduced the number of positions that you’re holding.

Gary Gamma: JT submitted a live question: “What can you expect from your personal advisor at Vanguard in regards to managing the tax efficiency of my retirement portfolio?” So, that’s another aspect that you’re obviously looking at.

Kevin Miller: Absolutely; so we try to utilize a concept called asset location. So, a lot of clients are familiar with asset allocation, which is just a blend between stocks and bonds. But we’ll take a look at the account types that you have, and it goes back to the example that I was talking about before. So, certain types of investments are better suited for different types of accounts. So, we’ll look at if you’re going to have this breakdown between stocks and bonds, we wouldn’t necessarily make every account look identical. We would try to put certain funds that are maybe less tax-efficient inside tax-deferred accounts, more-efficient investments inside taxable accounts.

So, looking at the taxes and also, if we have to make changes, working with a client to say, “Okay, how much tax impact are you willing to have?” will drive a lot of what we do as well.

Gary Gamma: I thought this was an interesting question from John. “What are some of the major mistakes you’ve seen older clients make, who may have benefited if they had an earlier discussion with a financial advisor?” Do you have some good stories on that one?

Don Bennyhoff: You want to start or do you want me?

Kevin Miller: I can start. I think a lot of it is the emotional part of it in making changes, especially when someone’s retired and they figure, “I’m not working anymore. This is all the money that I have for retirement so I can’t lose it,” and you tend— You can see some instances there where people make big dramatic changes in asset allocation at points that it’s not really warranted.

And again, it comes back to having that target in mind and then sticking to the target over time. Because generally, when people make those type of changes, it’s not random. It’s really the most inopportune time; it’s something that’s going on in the market where usually at that point, it’s too late and all you’re doing is you’re locking in losses, and they want to buy back in when the market—When things settle down.

But really, at that point, the market— It’s gone up, and they haven’t fully participated in the gains. So, I’ve seen some people that have made those big changes and then have stayed in cash for a long period of time and then haven’t participated in the great returns the markets have had recently.

Don Bennyhoff: I’d say we’ve actually been fortunate—we don’t see people make terrible mistakes. But I think there are some that— The one that comes to mind especially for maybe an older investor in retirement is we see them spend from their retirement accounts while they still have taxable assets.

So, Kevin— And I think the earlier question we had regarding how can we help with tax efficiency, this tax-efficient spending can be a tremendous value-add because money coming out of your tax-deferred account is obviously taxed when you draw that down, and it’s taxed typically at a higher rate than the capital gain rate that might be applied in a taxable account.

So, it’s completely understandable because someone’s going to all the trouble to set up these retirement accounts and diligently save in these retirement accounts for retirement so that they’ll have assets to spend, that they would spend from those assets first. But actually, it’s the opposite. They usually— The taxable registrations tend to be the ones that are more tax-efficient for spending for or from, and then going and approaching the tax-deferred and tax-advantaged assets last.

Gary Gamma: We have a couple of investment-related questions; maybe we can go through quickly. “Speaking of risk, are you now recommending keeping more in cash in anticipation of a market downturn?” Again, we can’t give advice, we’re a buy-and-hold shop, but what’s the mechanics of that question?

Kevin Miller: The way that we really look at cash is on a client-by-client basis. So, some clients that I talk to don’t really have a need for cash, and we think of it in terms of an emergency fund and things like that. Also, someone— Are they going to buy a car? Do they have a wedding coming up? Do they have the first year’s tuition that they have to pay? You know, those can all be really great reasons why you’d want to keep cash in the portfolio versus someone that doesn’t have these needs. So, our thought hasn’t really changed in those regards.

Gary Gamma: And Jim asks, “In down markets, do actively managed funds outperform index funds after fees?”

Don Bennyhoff: Well, I’ll tell you what. I’ll start, and you can add if I miss something. The evidence is unclear. We’ve actually looked at that—the rationale tends to be something like index funds are 100% invested and they’re at the market. So, they go up with the market and down with the market, and actively managed funds don’t have to be fully invested. And so, maybe they can perform differently, maybe even better.

While we’ve seen bear markets where we analyzed this, there have been some instances where actively managed funds have done better on average than index funds. In other markets, they haven’t. So, the jury is not necessarily clear on that. It is one of those things that we do tend to hear quite often as a myth mainly because it’s not— It doesn’t happen often enough and predictably enough where they outperform for it to actually be anything other than maybe they can, maybe they can’t.

Gary Gamma: Kevin, we talked a lot about helping get the investments set up, asking the important questions. Peter from California says, “Does the service include rebalancing the portfolio?”

Kevin Miller: Absolutely. It’s a real important part of what we do. So, generally, for a client that Vanguard is managing the accounts for them, we look at the portfolio on a quarterly basis. It’s based on the anniversary when someone would enroll in the service and not everyone gets— With the potential of rebalancing at the same times; sort of spread evenly across the quarter and really, what we’re looking at is not only the blend between stocks and bonds, but we’re looking at other parts of the portfolio as well. So, what’s the ratio between, say, U.S. stocks and international stocks even down to we were talking before, they have some individual positions, making sure that if one of these stocks is taken off, that it doesn’t grow too large for the overall portfolio.

But at the same time, we don’t necessarily rebalance every quarter. We’ll do it when necessary when things fall outside the guardrails. So, it’s more market-driven than just saying, “Okay, we have to make changes every single quarter.”

Don Bennyhoff: I think it’s important with rebalancing that rebalancing’s often associated with portfolio management, but it’s a very difficult thing to do in the moment. I know from experience with my peers in the past that a lot of times, when it’s time to rebalance our portfolio, we’re tempted if it’s a good day to kind of say, “Well maybe I’ll put it off for tomorrow because maybe it’ll keep going for a little while. I’ll wait for a down day.” Or, if it’s a down day, you put it off and don’t do it right when you should because maybe it’ll recover tomorrow. It’s an emotional hurdle. We talked about behavioral coaching a few times, and certainly rebalancing is one of those really important portfolio management techniques to manage the risk and return in the portfolio.

But it’s a behavioral aspect too that sometimes individuals on their own have a hard time doing without some coaching. So, having that person that can help kind of say, “Well, we don’t know what’s going to happen tomorrow, but we know what we said when we set up our rebalancing schedule. Let’s just follow it because we said we weren’t going to be—It’s not going to be an emotional decision for us. It’s going to be our time for the rebalancing.” We can take the emotions or the uncertainty of the market returns out of the picture.

Gary Gamma: And a related question from Michelle in Pennsylvania: “Things change. Do I need to get professional advice each time there’s a significant market change?”

Don Bennyhoff: Probably not. I mean, we’ve talked about this in terms of we do believe in strategic portfolio management, which means basically, we’re not changing things all the time like maybe someone who’s more tactical. That’s where the kind of the buy and hold idea comes into play.

What we do believe is that if someone—Their situation changes over time, we use the example of having a child or preparing for college or retirement or things like that. There are points in time in your life that you are— You should be reassessing the circumstances and deciding whether we should be changing things because of the change to the headlines of your life rather than the headlines in the news.

We don’t make changes due to market changes, with the exception of rebalancing. But there’s a rule for that. It’s not a reaction to just a change in the market because it dropped 5% this week.

Gary Gamma: Well, guys, we’re out of time. Before we wrap up, any final thoughts on the whole idea here of advisor services? Kevin, do you want to start?

Kevin Miller: Yes, it’s for the right client that realizes that they don’t have the time or the willingness or the ability; it can be a great benefit to them not only now, but in the future as well.

Don Bennyhoff: Yes, I think that’s an important aspect of this, that it’s a relationship. A lot of people go to advisors for portfolio management, but I think a lot of the value that an advisor can bring to the table is through the relationship management and helping coach people to see what they’re doing, why they’re doing it, and why they should continue to do it and not be swayed by the market headlines. So, it’s more of a relationship. So, when selecting an advisor and choosing one, don’t leave out that emotional aspect where that relationship— Find somebody’s who’s a good fit with you, not just somebody who promises you better returns.

Gary Gamma: Don, Kevin, thanks for your time. Appreciate it.

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