In finance, “alpha” is a measure of excess return — how much a strategy or portfolio beats the market after accounting for risk.
About 25 years ago, Vanguard asked the question –
“Can advisors themselves generate measurable alpha (better returns for retail investors, relative to market performance)?”
The below graph shows that retail investors could use some help:
Why did average investor returns not even outpace inflation, and lag far behind the S&P 500 or a balanced stock/bond portfolio from 1999 to 2018?
Vanguard identified a variety of reasons why retail investors underperform.
Their research found that clients who worked with advisors earned up to—or even exceeding—3% higher net returns per year, thanks to better investment choices, better portfolio structure, tax efficiency, and disciplined behavior. Vanguard called this effect “Advisor Alpha.”
Vanguard argues that it is not possible to create Alpha through trying to beat an individual market index (the basis of their low-cost indexed funds). I don’t agree, but their view makes it even more noteworthy that they argue that advisors can improve investor performance in many other ways. See Vanguard’s figure below:
Review this list and ask yourself how many of these best practices you are following. If you aren’t following these best practices, how much might you be leaving on the table?
Why Advisor Alpha ESPECIALLY Matters for Company Stock Holders
Holders of their company stock have similar concerns as all investors, but the potential value add of an advisor might be understated in the Vanguard research, given risks are often greater and there is more potential benefit if best practices are followed.
Employees with a large percentage of their Net Worth tied to their company stock often face:
- Emotional attachment and loyalty bias re: their company stock
- Risk, given their Net Worth and their livelihood are tied to the same organization
- Uncertainty around when to sell or diversify and a lack of management tools
- A significant potential tax exposure
A skilled advisor can guide how to reduce risk and unlock wealth— through strategy, discipline, and tax awareness.
Conclusion
Advisor Alpha proves that advice can be an investment in itself.
By combining smart diversification, emotional discipline, and tax-aware strategies, clients—especially those with concentrated company stock—can turn their hard work and expertise into lasting wealth.
Read the entire Vanguard Advisor Alpha 25th anniversary report here.
