BEHAVIORAL COACHING Vanguard Advisor s Alpha

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1 BEHAVIORAL COACHING Vanguard Advisor s Alpha

2 Deepen your client relationships > Tools for your clients.

3 > Portfolio construction Vanguard Advisor s Alpha Behavioral coaching The fee-based Vanguard Advisor s Alpha service model replaces conventional outperformance value propositions with an approach based on cost-efficient portfolio construction, ongoing behavioral coaching, and comprehensive wealth management. Wealth management It s a model that you have the ability to control and use to successfully enhance your client relationships. Grow your practice with Vanguard Advisor s Alpha Incorporate the Vanguard Advisor s Alpha model into your practice to deepen your client relationships, gain wallet share, and enhance your cross-generational acquisition efforts. The enclosed materials show you how. Tools for you.

4 Vanguard Financial Advisor Services TM P.O. Box 2900 Valley Forge, PA Connect with Vanguard > advisors.vanguard.com > The Vanguard Group, Inc. All rights reserved. FOR FINANCIAL ADVISORS AND INSTITUTIONS ONLY. NOT FOR PUBLIC DISTRIBUTION. FASBCFOL

5 For investors Key principles for investing success Define clear goals, invest with balance and diversification, minimize cost, and maintain discipline. These core investing principles are united by a common theme: Focus on the things within your control. By attending to the things you and your advisor can influence, rather than uncontrollable factors such as the markets, the economy, or the performance of an individual security or strategy, you give yourself the best opportunity for investing success.

6 GOALS Create clear, appropriate investment goals Your financial advisor can help you define clear, realistic goals and design an investment plan that meets your individual needs. A sound investment plan can help you stay focused and avoid temptations such as performance chasing or reacting impulsively to market turbulence. Investors often flock to highly rated funds. However, there s no guarantee that a fund s recent success will persist. The chart below shows that the highestrated funds lagged their benchmarks by the greatest amount over the subsequent three years. Conversely, the funds with the lowest ratings did the best job of tracking their benchmarks. BALANCE Develop a suitable asset allocation using broadly diversified funds The right asset allocation is critical. It should be based on your individual goals and constraints and strike the right balance between risk and return. If you assume too little risk, you may fail to stay ahead of inflation or to achieve long-term goals. Yet, if you assume too much risk, you may take on levels of volatility that tempt you to abandon your strategy. A portfolio that diversifies across the financial markets is less vulnerable to the impact of significant swings in performance by any one segment. Positive past performance can mean disappointing future returns Annualized 36-month fund performance relative to benchmark 0 Morningstar rating Annualized 36-month fund performance relative to benchmark (in percentage points) Median performance of stock funds versus style benchmarks over the 36 months following a Morningstar rating Notes: Past performance does not guarantee future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. Morningstar ratings are designed to bring returns, risks, and adjustments for sales loads together into one evaluation. To determine a fund s star rating for a given time period, the fund s risk-adjusted return is plotted on a bell curve. If the fund scores in the top 10% of its category, it receives five stars; in the next 22.5%, four stars; in the middle 35%, three stars; in the next 22.5%, two stars; and in the bottom 10%, one star. The overall rating is a weighted average of the available three-, five-, and ten-year ratings. To calculate the median performance versus style benchmarks, Vanguard first assigned each fund to a representative benchmark according to size and style (growth versus value). We then compared the performance of each fund with the performance of its style benchmark for each 36-month period since June Funds were grouped according to their star ratings, and we then computed the median relative return versus the style benchmark for the subsequent 36-month period. Data are through December Sources: Data on cash flows, fund returns, and ratings were provided by Morningstar. Index data to compute relative excess returns were provided by Thomson Reuters Datastream. Morningstar data 2017 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. More information is available in the Vanguard research paper Mutual fund ratings and future performance (Philips and Kinniry, 2010).

7 COST Take control of your costs; keep more of your returns You can t control the markets, but you can often control what you pay to invest. Every dollar you pay in fees is a dollar less earning a return for you, and that can make an enormous difference over time. Index funds and ETFs tend to have costs that are among the lowest in the fund industry. DISCIPLINE Maintain perspective and long-term discipline Abandoning a planned investment strategy can be costly, and some of the most significant factors are behavioral: the failure to rebalance, the allure of market-timing, and the temptation to chase performance. Working with an advisor can help you keep a long-term perspective and resist the reactionary impulses that all investors sometimes face. Volatility is a fact of life remember to stay the course Short-term turbulence 5% 4 3 Cuban missile crisis, JFK assassination Black Monday Black Monday Russian Russian debt default, debt default, Long-Term Long-Term Capital Capital Management Management bailout bailout Global financial crisis Global financial crisis Long-term growth $12,000 $8,000 7,000 10,000 6,000 8,000 5,000 6,000 4,000 3,000 4,000 2,000 2,000 1, day S&P 500 Index average price movement, 1960 May , 2017 Cumulative nominal growth of $100 for 50% stock and 50% bond portfolio, 1960 June , 2017 Source: Vanguard calculations, using data from S&P Standard Dow & Jones Poor's, Indices, Bloomberg, Bloomberg, and Thomson and Thomson Reuters Reuters Datastream. Datastream. Notes: Growth of $100 begins at January 31, U.S. stocks are represented by the S&P 90 Index from 1926 to March 3, 1957; the S&P 500 Index from March 4, 1957, to 1974; the Dow Jones Wilshire 5000 Index from 1975 to April 22, 2005; and the MSCI US Broad Market Index thereafter. U.S. bonds are represented by the S&P High Grade Corporate Index from 1926 to 1968, the Citigroup High Grade Index from 1969 to 1972, the Lehman Brothers U.S. Long Credit AA Index from 1973 to 1975, and the Bloomberg Barclays U.S. Barclays Aggregate U.S. Bond Aggregate Index thereafter. Bond Index thereafter. Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

8 Vanguard Financial Advisor Services P.O. Box 2900 Valley Forge, PA All investing is subject to risk, including possible loss of principal. Diversification does not ensure a profit or protect against a loss. 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. For more information about Vanguard funds or Vanguard ETFs, contact your financial advisor 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. Financial advisors: Visit advisors.vanguard.com or call The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. FASBCCLI

9 For investors Don t let your emotions get the best of your investments Investing can be emotional. Even seasoned investors may act impulsively in the face of turbulent markets, incendiary headlines, or the lure of the hottest new fund. That s why a carefully considered investment plan is an important tool to help you keep things in perspective. In times of uncertainty, ask: Have my goals changed? Has my time horizon changed? Have my constraints changed? Yes. Meet with your advisor to revisit your financial plan. No. Odds are, you d do well to stick with your financial plan. This is standard financial advice. Yet, like many investors, you may find yourself considering an impromptu change to your portfolio. Here are a few tips to keep you on track: Fully understand your financial plan Your plan should be based on your individual circumstances including asset allocation, risk tolerance, savings rate, and short- and long-term goals. Understanding the reasoning behind the elements of your plan can help you stick to it over time. Focus on asset allocation, not funds Unlike with a consumer purchase, product ratings are typically poor criteria for investment decisions. Product selection and market timing account for only 12% of a diversified portfolio s returns over time. Asset allocation drives the other 88%. 1 Stay focused on your long-term progress The performance of a single investment or asset class is less important than the performance of your entire portfolio over time. Avoid reactionary decisions Investors who flee the market may miss the worst and the best trading days. A balanced portfolio is designed to withstand market turbulence over time. Impulsive actions disrupt adherence to your financial plan, which was carefully constructed to best serve your needs. continued on back

10 Work with your advisor to rebalance Sticking with your financial plan also means rebalancing as scheduled. While you may be reluctant to sell a few good performers, maintaining your asset allocation is important to help minimize risk. Historically, portfolios that were rebalanced as scheduled fared better than those that weren t. Revisit the Principles for investing success A focus on goals, balance, costs, and discipline is an important foundation for a successful portfolio. Consult your advisor Your advisor can help you Put headlines in perspective. Review your financial plan. Understand each of your options. Recognize the realistic implications of any potential change. A balanced, diversified investor has fared relatively well Portfolios indexed to $100 October 9, 2007 U.S. equity market bottom March 9, 2009 Peak through June 30, % stock/ 50% bond 100% bond +67% +1% % cash 28% % stock/50% bond 100% bond 100% cash This is a hypothetical illustration. Source: FactSet. Notes: The 50% stock/50% bond portfolio is represented by the Standard & Poor s 500 Index and the Bloomberg Barclays U.S. Aggregate Bond Index (rebalanced monthly). The 100% bond portfolio is represented by the Bloomberg Barclays U.S. Aggregate Bond Index. The 100% cash portfolio is represented by 3-month Treasury bills. Past performance is no guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. 1 Source: Vanguard calculations using data from Morningstar. Calculations are based on monthly returns for 518 U.S. balanced funds from January 1962 through December For details of the methodology, see the Vanguard research paper The global case for strategic asset allocation (Wallick, et al., 2012). Note: For asset allocation to be a driving force of an outcome, one must implement the allocation using vehicles that approximate the return of market indexes. Connect with Vanguard > advisors.vanguard.com > Vanguard Financial Advisor Services P.O. Box 2900 Valley Forge, PA Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. 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. Diversification does not ensure a profit or protect against a loss The Vanguard Group, Inc. All rights reserved. FASBCCKL

11 For advisors Adding value through behavioral coaching One of the most valuable services you can provide as a financial advisor is behavioral coaching. You can help clients ignore sensational headlines and other market noise by serving as an emotional circuit breaker and coaching them on the strengths of a balanced portfolio. Effective behavioral coaching means you: Use a financial plan as the anchor. Set clear expectations at the start of your relationship. Help clients remain calm during periods of market volatility. Spend more time developing relationships, not reacting to markets. While the first step in developing a meaningful advisory relationship may be to help clients create realistic financial plans, the next step helping clients stick to those plans when emotions run high is more challenging.

12 Sharing a core set of investing principles with your clients can differentiate you from your peers, add value to client relationships, and help clients make decisions that give them a better opportunity for investing success. Share these four timeless investing truths with your clients: GOALS It all starts with the financial plan as the anchor. Clearly defining investment goals and being realistic about ways to achieve them can help protect your clients from common mistakes that could derail their progress. DISCIPLINE Because investing evokes emotion, helping clients maintain a long-term perspective and a disciplined approach should benefit even those who are sophisticated investors. BALANCE Diversifying a portfolio across the financial markets should make it less vulnerable to the impact of significant swings in performance by any one segment. COST The lower the costs, the greater your clients share of an investment s return. And research suggests that, historically, lower-cost investments have outperformed higher-cost alternatives, on average. 1 1 Vanguard, Vanguard s Principles for Investing Success. Valley Forge, PA.: The Vanguard Group. A balanced, diversified investor has fared relatively well $ Portfolios indexed to $100 October 9, 2007 U.S. equity market bottom March 9, 2009 Peak through June 30, % stock/ 50% bond 100% bond 100% cash +67% +1% 28% % stock/50% bond 100% bond 100% cash Source: FactSet. Notes: The 50% stock/50% bond portfolio is represented by the Standard & Poor s 500 Index and the Bloomberg Barclays U.S. Aggregate Bond Index (rebalanced monthly). The 100% bond portfolio is represented by the Bloomberg Barclays U.S. Aggregate Bond Index. The 100% cash portfolio is represented by 3-month Treasury bills. Past performance is no guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. This is a hypothetical illustration.

13 Remember, as a behavioral coach you are there to act as your clients emotional circuit breaker. You will reassure them and keep them invested during the tough times and help them rebalance their portfolios even when market trends are all pointing upward. Behavioral-finance research shows that investors are often their own worst enemies. Tips for becoming a successful behavioral coach Implement key principles for investing success. - Stress that the financial plan is the anchor. - Set investment goals that are measurable and attainable. Educate clients about maintaining perspective and long-term discipline. - Gain their understanding and buy-in of your portfolio construction approach. - Reiterate that the plan is based on attaining personal financial goals not outperforming the markets. Communicate frequently with clients, with empathy and understanding. - Set clear expectations. - Use ongoing and consistent communications. - Practice emotional sensitivity. Promote a view of the big picture. - Refocus clients attention beyond the performance of individual investments to that of their entire portfolios. - Coach clients to evaluate their progress toward reaching their long-term goals. - Counsel them during moments of emotional crisis. - Use stories of how staying the course through past market corrections rewarded investors over the long term. By being a successful behavioral coach, you may save clients from significant wealth destruction and potentially add percentage points rather than basis points of value to their portfolios. To learn more, contact Vanguard Financial Advisor Services at

14 Vanguard Financial Advisor Services P.O. Box 2900 Valley Forge, PA Connect with Vanguard > advisors.vanguard.com > All investing is subject to risk, including possible loss of principal. For more information about Vanguard funds or Vanguard ETFs, visit our website or call 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 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. FOR FINANCIAL ADVISORS ONLY. NOT FOR PUBLIC DISTRIBUTION. FASBCADV

15 For advisors Best practices of a successful behavioral coach As a behavioral coach, you are there to act as your clients emotional circuit breaker, reassuring them of the validity of the financial plan. Research shows that investors are often their own worst enemies. Here are a few tips to keep you on track: Educate and set expectations Establishing a solid base of education in your initial meetings with clients should help them stay the course. According to Vanguard research, behaviors that can lead investors astray recede when advisors improve client education and communication. Set clear expectations and ensure that clients understand that market performance is not the ultimate goal. Gain full understanding of each step of the investment process, from goal setting and time frames to tax implications. Use ongoing and consistent communications. Make the financial plan the anchor The financial plan that you design and agree upon with clients should be central to every conversation and meeting. A collaborative financial plan can serve as an important emotional anchor when clients feel panicked or are hungry for gains. Define goals clearly and be realistic. Steer clients away from common investment mistakes. Build portfolios from the top down. Discourage a fund-collecting strategy. Practice emotional sensitivity Your job doesn t end when you make sound investment recommendations. Your success may depend on getting clients to stick to these recommendations. Use clients emotional reactions as avenues for further communication. Address risk and return opportunities on an emotional level. (Is a small increase in return worth the added stress that a higher-risk strategy entails?) Acknowledge their emotions and explain reasons for recommendations. Focus on compromises that allow clients to feel comfortable on an emotional level. continued on back

16 What is your value to clients? Vanguard Advisor s Alpha is a value proposition based on top down portfolio construction, behavioral coaching, and wealth management. The essence of the advisor s alpha concept is that consistent market outperformance is unrealistic and that your clients will value and benefit from the holistic wealth management you provide. By shifting your primary focus away from outperforming the market and toward personalized client goals and controllable, relationship oriented services, you can deepen and strengthen your connections with clients. Portfolio construction Wealth management Vanguard Advisor s Alpha Behavioral coaching FOR FINANCIAL ADVISORS AND INSTITUTIONS ONLY. NOT FOR PUBLIC DISTRIBUTION. Widen the frame Focus clients attention on the long-term and the performance of their entire portfolio rather than on the short-term performance of an individual investment. Find the required return that fits the client. Emphasize that required returns are an output from the investment plan, whereas desired returns are an input a return target based on want rather than need. Coach clients to evaluate progress toward their long-term goals. Point out that although a particular asset is underperforming, other parts of the portfolio are making positive contributions. Guide them through moments of emotional crisis and stay committed to their broader financial strategy. Hone your communication strategy Develop a firm communication policy and make a written commitment to clients. Identify when, how, and how often they ll hear from you. Let them know how quickly they can expect a reply from you or someone in your stead. Write recurring columns to set expectations and gain loyalty. Focus meetings on bigger-picture topics, not just investments. How can Vanguard help Demonstrate your value: Advisor s alpha tool kit Quantifying your value Client guide: How your advisor adds value Vanguard Advisor s Alpha A guide to building stronger client relationships Educate clients: Vanguard s principles for investing success Create clear, appropriate investment goals Develop a suitable asset allocation using broadly diversified funds Maintain perspective and long-term discipline Leverage expert commentary: Consider the big picture during periods of market stress Required or desired returns? That is the question Help clients stick to their long-term investment plans Connect with Vanguard > advisors.vanguard.com > Vanguard Financial Advisor Services P.O. Box 2900 Valley Forge, PA All investing is subject to risk, including possible loss of principal. FOR FINANCIAL ADVISORS ONLY. NOT FOR PUBLIC DISTRIBUTION The Vanguard Group, Inc., All rights reserved. FASBCACL