A hot topic right now, for advisers and providers alike, is that of how to demonstrate value. I was therefore interested to see a research paper from Russell Investments in Australia, estimating that advisers deliver value of at least 4.4% or more every year to their clients beyond investment-only advice (a stat much higher than the 3% p.a. 'adviser alpha' I often quote from Vanguard). Below you will find key highlights from the report.
Before you read on, note well: the report is based on the Australian market, however I believe the themes are consistent with what we see here in the UK.
Helping clients understand the value you deliver
In the report, the following formula is used to quantify the value of advice - not just your technical expertise, but also the emotional support and guidance you offer throughout the client’s investing journey.
The value of each component piece
Now let's now consider each element and the value it can add over the course of a year:
1. Annual Rebalancing - variable % p.a.
We all understand the importance of rebalancing to mitigate risk. Most of the advisers I work with rebalance at a client's annual review. Others - particularly those with discretionary permissions - rebalance quarterly. The jury is still out (in my mind anyway) about how frequently a portfolio should be rebalanced. What we can't contest is that rebalancing adds value.
The example shown in the report illustrates that over the course of just 12 months a balanced portfolio can drift into the realms of a growth portfolio - creating additional risk that the client didn't sign up to. Managing this risk, while difficult to quantify as it will depend on market movements and frequency within a year, adds value to the client.
2. Behavioural mistakes - estimated 1.9% p.a.
Behavioural coaching is one of the most vital parts of the service an adviser provides. Investors often react to short-term market volatility, which can undermine their long-term objectives. By buying high and selling low, an investor can adversely impact the returns the could achieve vs. staying the course. A trusted adviser, by guiding investors to avoid these behavioural mistakes, can add as much as 1.9% p.a. of additional return to an investor’s portfolio.
I really like this conversational aid included in the report:
3. Cost for getting it wrong - estimated 1.6% p.a.
Investing without professional financial advice is often viewed as an effective way to lower the costs of investing, however things that can go wrong - ultimately adding to the cost of investing.
The investor may not set the right investment strategy for their needs, they may lack the skills or time to filter through the many investment options available or they may be tempted to chase performance and over-react to market events.
Research from Deloitte shows that investors often experience a disconnect between their risk profiles and their return expectations. In their Australian study 81% of investors under 35 said they were seeking guaranteed or stable returns, compared to 41% of those aged over 55. In addition, 21% of the most risk-averse investors expected returns over 10%.
It follows, therefore, that your role in helping clients to determine the best possible investment strategy and risk profile to meet their objectives adds value - to the tune of 1.6% p.a.
4. Proper financial planning - variable % p.a.
Every adviser I work with goes way behind delivering a purely investment-focused service. They build and regularly update financial plans, conduct regular portfolio reviews, offer complex tax and estate planning, investment and cashflow analysis,
retirement income planning, assistance with annual tax return preparation and respond to add-hoc requests from clients.
Quantifying the value of planning is difficult (and variable) because it will depend on the advice firm and the services offered.
In the report, they assume the following services (labelled as 'Ancillary', which I completely disagree with because any financial planning firm will offer these services as a matter of course) can consume 20, 50 or 100 hours per year:
5. Tax Planning ('tax-smart investing' in the report) - estimated at 0.9% - 1.2%
Financial planners have the technical expertise to help clients make the most of their tax circumstances and also help clients to avoid any unexpected surprises at tax time.
The report cites the value of an adviser for tax-smart investing is at least the sum of:
» tax effective investment strategies
» maximising pre- and post-retirement contributions (within allowable bands)
They estimate the value of this to be between 0.9% and 1.2%p.a., depending on whether a client is in accumulation or the transition to retirement phase.
The bottom line...
Bringing it all together, the report shows the value financial advisers' deliver. It quantifies the contribution of technical and emotional guidance a trusted human adviser, delivering services and value above and beyond investment-only advice, can potentially offer.
Value of more than 4.4% p.a.
I encourage you to read the full report. You can request a copy using this link.
This article was originally created for the DISCUS website (Discretionary Investment Services Coming Under Scrutiny), an information resource for financial advisers interested in outsourced investing. The weekly DISCUS newsletter became Embark News on 31 October 2019.