Vanguard: Costs Matter When There's No Value

June 18, 2018 — 2:46 PM EDT

Low-cost investing has been all the rage as investors clamor to get in on passive, cheaper types of investments such as exchange-traded funds. But will the same cost consciousness carry over to the world of financial advice? According to Vanguard, the answer is a resounding yes if the financial advisor isn't providing any value-add with that advice.

"Value is very subjective and often personal, and it relies on an assessment of both costs and benefits. It's why we don't all drive the same car or pay a CPA to do our taxes. It's also why some people prefer to work with an advisor rather than try to handle their financial matters alone," wrote Donald G. Bennyhoff, a senior investment strategist for Vanguard Investment Strategy Group, in a recent blog post. "Some people see the benefit, while others see mainly the cost. The tricky part is helping people see both links in the value chain, not only the cost but the benefit as well."

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According to Bennyhoff, financial advisors have to make choices that can add value and aid in improving investment outcomes such as creating the proper asset allocation, engaging in rebalancing and developing tax-efficient portfolios. Those value-add services, however, will be "opaque" to clients unless the advisors make them clear, said Bennyhoff. "If you have carefully built an investment portfolio with lower costs in mind, take the time to explain to clients how cost- or tax-efficient the portfolio or strategy can be," he said.

The same goes with financial advisors that embrace a strategic philosophy rather than a tactical one. According to the Vanguard executive, it falls on these advisors to explain how that choice will benefit clients, particularly since strategic is often confused with a passive strategy. That confusion can raise the ire of clients if they feel they are paying too much.

"It's actually an active choice to maximize the probability of cost and tax efficiencies while minimizing active risk. Sometimes the hardest but most beneficial thing you can do for clients is to help them do nothing," argued the Vanguard investment strategist. "That specific choice would fall under the behavioral-coaching facet of advice, and, as our research suggests, being strategic by doing nothing can be a very significant value-add for an advisory relationship."

Bennyhoff noted that providing clients and prospective ones with a menu of value-added services can give them a better sense of what they need now but also into the future. He added that this can aid in client retention and give clients a better sense of what value the advisor is bringing to the table.