Unearthing gems from my advice data collection

Why am I telling you this (aside from the cathartic benefits)? Because my collector’s focus lately has been on data related to managed accounts and the value of advice for participants. I’ve written before about the importance of considering more than just performance when evaluating an advice provider and about Vanguard’s ongoing efforts to help plan sponsors and consultants fulfill their fiduciary oversight responsibilities. We’ve made good progress since that blog post, with a new quarterly report for plan sponsors offering Advice from Vanguard, a recent research paper on the emotional and time value of advice, and an upcoming paper on the value of advice (stay tuned, as I think the Advice Guy may even bring you an interview with the author in my next post).

So now that you’re in on my secret collection, I’d like to unlock the vault and share with you a few of my favorite recent gems.

Let’s begin with two charts on the topic of portfolio value from my formidable Vanguard teammate Mark Swartley. They come from internal research and haven’t been published, so you can consider them rare collector’s items. We’re often asked about portfolio personalization and whether advised portfolios are different enough from each other and from the target-date glide path to justify the advice fees. These charts are a great way to help understand how advised glide paths can be different enough—and more!

The first one looks at participants enrolled in Vanguard Digital Advisor^® and Vanguard Personal Advisor^® relative to the Vanguard Target Retirement glide path, showing that 80% have a stock allocation that is more than 5% different from the associated Target Retirement stock allocation for their age. For most advised investors, the result is a more aggressive portfolio, demonstrating the potential to generate higher returns through advice personalization. Ninety percent have stock allocations that are higher than the Vanguard target date, with 73% more than 5% higher.

The second chart digs deeper into what is causing this differentiation among advised participants. Each color represents one of the five available risk tolerance levels. While risk tolerance is an important input for Vanguard personalized glide paths, the other variables (like retirement age, marital status, and saving rate) also matter a lot. The variety of inputs explains how participants of the same age and risk tolerance can have significantly different asset allocations or, by contrast, have the same age and asset allocation but different risk tolerances.

Rummage, rummage, rummage (given the written format, please provide your own sound effect of me digging through my treasure trove of data).

Next is some intriguing analysis from a talented Vanguard researcher, Xiao Xu, who looked at the impact of target-date investors being grouped into five-year age bands (the standard practice in the industry) compared with that of advised investors having personalized retirement years.

As Xiao points out, two investors born one day apart (one on December 31, 1972, and the other on January 1, 1973) would be defaulted into different target-date funds—2035 versus 2040. While both products follow the same overall glide path, as seen in the chart below, their individual portfolios would have different stock/bond mixes for about 30 years! Using some basic assumptions,¹ the investor with the 1973 birthdate, who is invested in the 2040 fund and maintains a higher stock allocation for longer, could have a higher average inflation-adjusted retirement wealth of around $70,000. One day can make a big difference! With advice, we don’t have to worry about unintended consequences like that. We’re able to consider each investor’s unique characteristics and preferences and build personalized portfolios that are just right for them.

Finally (at least for now, as I can’t share all of my treasures at once!), here’s a highlight from the paper I mentioned earlier on the emotional and time value of advice. When Vanguard asked nearly 8,000 clients why they signed up for financial advice, 74% selected emotional value (that is, peace of mind), behind only portfolio value (investment selection and portfolio monitoring).²

“Then, once clients are getting advised,” note the paper’s authors, “86% of them say that advice gives them peace of mind—so even clients who did not consider peace of mind as a key reason for signing up end up benefiting from it.”² This is a powerful reminder that while we certainly need to monitor the readily quantifiable metrics like performance and fees, let’s not forget the other value that participants are receiving.

I know I jumped around a bit as I waded through my data collection. Hopefully the brilliance (pun intended) of these advice gems made up for any bumpiness and that you enjoyed this glimpse into the kind of stuff that gets me excited.

Sources

¹ The analysis uses the Vanguard Financial Advice Model for simulation and assumes the annual contribution amount to be $8,140 from age 20 to 95, reflecting an annual compensation of $74,000 and an 11% total contribution rate. The analysis assumes no withdrawals or taxes, focusing solely on total wealth accumulation. Capital market assumptions are based on the steady-state Vanguard Capital Markets Model^® (VCMM) forecasts as of August 31, 2024. IMPORTANT: The projections and other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from VCMM are derived from 10,000 simulations for each modeled asset class. Simulations as of October 2024. Results from the model may vary with each use and over time. For more information, please see the About the Vanguard Capital Markets Model section below.
² Paolo Costa, Marsella Martino, and Malena de la Fuente. The Emotional and Time Value of Advice. Vanguard, 2025.

Notes

• All investing is subject to risk, including the possible loss of the money you invest.
• For more information about Vanguard funds, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
• Vanguard Digital Advisor's and Vanguard Personal Advisor's services are provided solely by Vanguard Advisers, Inc. (VAI), a registered investment advisor. Please review the Vanguard Digital Advisor and Personal Advisor brochure for important details about this service. Vanguard Digital Advisor's and Personal Advisor's financial planning tools provide projections and goal forecasts, which are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
• Vanguard Situational Advisor is provided by Vanguard Advisers, Inc. (VAI), a registered investment advisor. Eligibility restrictions may apply.
• VAI is a subsidiary of The Vanguard Group, Inc. (VGI) and an affiliate of Vanguard Marketing Corporation (VMC). Neither VAI nor its affiliates guarantee profits or protection from losses.
• There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
• Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in target-date funds is not guaranteed at any time, including on or after the target date.
• Certified Financial Planner Board of Standards Inc. owns the certification marks CFP^®, CERTIFIED FINANCIAL PLANNER^®, in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

 

About the Vanguard Capital Markets Model

IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results  will vary with each use and over time.

The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.

The Vanguard Capital Markets Model^® is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.