Does hiring an investment advisor improve your portfolio returns? This question is often on the minds of our clients or prospective clients. The value of an advisor is often easier to describe than define numerically. Many clients find value in hiring an advisor to provide “peace of mind” and comfort that a professional is watching over their portfolio. This value can be difficult to quantify because it varies by client.
Value measurement – What is Alpha?
Investors have many tools available to evaluate the performance of portfolio managers. One such tool is the Jensen Measure, named after its creator, Michael Jensen. The Jensen Measure calculates the excess return that a portfolio generates over its expected return. This measure of return is commonly known as Alpha. Alpha is an elusive quality. Very simply put, it is the ability to beat an index fund without adding risk to a portfolio. Investment managers are always seeking it but rarely sustain it.
The academic evidence strongly suggests that delivering above-average returns without adding additional risk is extremely difficult or nearly impossible in the long run. However, most of what we read in the business news or watch on TV is directly aimed at uncovering the elusive manager able to “beat the market” and deliver consistent Alpha to investors. The fixation on market beating returns has often led to dire results for the average investor.
So how does an investor measure the value of an advisor who plans to match market benchmark returns? It’s a question that Vanguard set out to answer in a recently published paper for investment advisors titled “Putting a value on your value: Quantifying Vanguard Advisor’s Alpha.” Vanguard explored the idea of advisor Alpha more than a decade ago. They recognized that the conventional wisdom of advisors providing value by “beating the market” was outdated and disproved by academic evidence. Interestingly, the areas of best practices for wealth management that Vanguard identifies are identical to the values we have been providing for clients for over 20 years. They are:
Other articles filed under Family Finances
May 8, 2018
Last week, we introduced you to our weekly Investment Committee meetings. When we met for class on 4/27/18, we began our discussion on the subject of an "optimal portfolio." The centerpiece of investment management is portfolio construction. Alongside financial planning,...
May 4, 2018
Introduction People from all across the world look forward to Friday. Friday marks the end of a (usually long) work week and the start of what is supposed to be a relaxing weekend. At Rockbridge, we look forward to Friday’s,...
April 23, 2018
Stock Markets Returns from various stock market indices over several periods ending March 31, 2018 are shown to the right. Here are a few highlights: While not observed in these graphs, volatility seems to have come back, which is normally...
April 19, 2018
As another tax season comes to a close, we wanted to draw attention to a number of scams and schemes to defraud unsuspecting taxpayers. We think it is important that our clients be aware of how these scams work, and...
April 17, 2018
It’s common for investors to feel nervous when looking at investments by themselves. Are you saving enough? Are you saving in the right place? Are you holding the right mix of investments? Should you own individual stocks or funds? Are...