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The value of financial advice amid rise of retail investors

The third annual Value of an Adviser report from Russell Investments outlines five key elements that make up the value of advice, including:

  • preventing behavioural mistakes
  • advising on appropriate asset allocation
  • making investors aware of the cost of holding cash
  • providing advice on tax effective strategies, and
  • knowledge in additional wealth management services.

The rise of the retail investor

While the financial advice industry has undergone a significant period of disruption and uncertainty in recent years, the profession is now on a more promising trajectory.

New education requirements and regulations are transforming the sector and the exit of the major banks from the wealth management space has left plenty of room for new, innovative players.

But the COVID-19 pandemic and its economic impact have proven to be a critical event that has effectively allowed financial advisers to shine. When markets took a hit and the world went into a panic in the early months of 2020, Australians turned to financial advisers for guidance.

The impact of COVID-19 on the personal finances of Australians and financial markets has created a growing phenomenon: the rise of the retail investor actively participating in the stock market.

During a period of extreme volatility, Australian investors of all ages and levels of experience have jumped into the market, hoping to emulate the wealth they have seen others achieve. It is in this environment where financial advisers have provided value.

According to this year’s Value of an Adviser report, helping clients avoid common behavioural tendencies such as chasing short-term volatility comprises 2.2% of a total 5.2% in value advisers provide their clients each year.

The report argues that, statistically, the average equity fund investor’s inclination to chase past performance cost 2.2% annually in the 34-year period from 1984–2020.

Behaviour coaching is a vital service. While there is strong evidence that portfolio value increases over time, investors can still feel compelled to react to short-term market volatility, which can undermine their long-term objectives.

The report notes that during both COVID-19 and over the longer term without professional advice, investors fall prey to their own behavioural biases, leading to losses in their portfolios that could impact their financial security.

Tax-effective investing

Often considered the realm of the accounting profession, tax is also an important conversation between financial advisers and their clients. Advisers can assist in the management and optimisation of investment tax in a number of ways, including structural tax strategies, managing client-driven trading, and making portfolio recommendations that are tax-efficient for clients.

Taking into account these approaches, Russell Investments estimates the tax-effective investing benefit that advisers can provide is around 1.5% p.a.

In terms of portfolio advice, advisers are also recommending managed portfolios as they provide opportunities to better manage a client’s investment tax implications. Managed portfolios that sit on investment platforms and are professionally managed by an investment manager allow investors to hold the portfolio components directly, providing more transparency and control when optimising tax for individual clients.

When it comes to helping clients with more specific and complex tax needs, many financial advisers work in close partnership with accountants, solicitors, and other professionals. This combined experience provides significant advantages to clients.

Rounding out the numbers

While avoiding behavioural mistakes (2.2% p.a.) and tax-effective investment advice (1.5% p.a.) provide the lion’s share of an adviser’s total value to clients per year (5.2%), it is important to recognise the other aspects that are included in the report.

The following formula helps to understand the full value of financial advice services: A+B+C+E+T = value of an adviser.

The formula can be explained as follows:

  • A is Appropriate asset allocation = 0.90% p.a. Helping clients to work through their values, preferences, and motivations from the outset.
  • B is for Behavioural mistakes = 2.2% p.a. Helping clients avoid common behavioural tendencies may help achieve better portfolio returns than those investors making decisions without professional guidance.
  • C is for Cost of cash = 0.6% p.a. Holding too much cash can come at a cost. Advisers can assist clients in investing in a well-diversified portfolio that seeks to balance the needs of liquidity and targeting growth within the risk levels appropriate to the client.
  • E is for Expertise = more added value. A common misconception is that financial advisers are purely investment managers, whose only job is to select investments and achieve a certain level of return. Quality financial advice goes way beyond this.
  • T is for Tax-effective investing = 1.5% p.a. Advisers play an important role in a client’s tax journey, helping them navigate key components when it comes to tax-efficient strategies.

Expert knowledge is invaluable through periods of change. Whether personal circumstances change, due to redundancy, personal trauma, inheritance or business transactions, advisers will work with clients to identify the best path forward.

If there are external changes, like legislative changes, tax treatment of super or other assets, an adviser will be able to assess the details of the change and evaluate the impacts to the client’s individual circumstances.

As the nation navigates its first recession in close to three decades, the value of financial advice has never been more important.

 

Tanya Hoshek is Head of Distribution, Adviser & Intermediary Solutions at Russell Investments. A full copy of the report can be requested here. This article is for general information only and does not consider the financial circumstances of any individual.

 

11 Comments
MW
November 04, 2020

A lot of people outsource things where they don't have the time, skills or inclination to do them theirselves. Lot's of examples including: cleaning, gardening, painting - all things that theoretically someone can do themselves. Others who look to excel at something or just achieve some goals will pay for coaching; lets think fitness, sport, art etc.

Value is always assessed by the person recieving the service and will vary from person to person.

SMSF Trustee
November 04, 2020

Absolutely right, MW.

And it's simply pompous arrogance for those who choose to do their own investing to say that the service that planners/advice provide to others is of no value.

AlanB
November 05, 2020

Pompous arrogance is displayed when casually mentioning one's gardener, personal trainer or financial advisor. It's a form of one upmanship to show off self wealth and perceived self importance with the intention of impressing others.

Steve
November 03, 2020

A dilemma for advisors is the fear of producing inferior outcomes if they deviate from the accepted portfolio mix for a given risk appetite (and potential liability for poor advice). So they tend to give rather vanilla advice. Much of which should be readily available on the internet. Add the ability of ETF's to build a simple, low cost portfolio which has a good level of diversification and the basic role of an advisor is largely commoditized. Of course there will be specific tax/pension/centrelink issues which you may need to pay for good advice. As another person noted above, do you keep your plumber on a retainer or just pay for his services when you need them? Finally an article like this in this type of forum is probably not the ideal target audience; I suspect many of the people here are 'above average' in their financial education and hence the most basic educational value of an advisor is less apparent.

CJ
November 01, 2020

Financial advising industry overvalues its contribution to investors. Having met with multiple advisors, I have yet to learn something I haven't learnt reading books of people Noel Whittaker, Paul Clitheroe or others. This article is a great example of overvalued view of the financial advisory industry.

AlanB
October 31, 2020

It was once written as a well known fact that a man in possession of a fortune must be in need of a wife.
Nothing in this article persuades me that anyone with basic common sense is in need of a financial advisor/planner.

J.D.
October 29, 2020

While it's true that advice of using an appropriate asset allocation, reducing cash drag, and tax efficiency would bring a significant ongoing return, I hope the implication is not a justification that an advisor should be getting an ongoing percent of assets fee for this.

When you plan for a major financial event like selling an investment property or business, you go to an accountant who finds the best way to minimise tax, yet the accountant does not get an ongoing return from this.

So, yes an advisor definitely would provide a significant financial advantage for most people, however most of that advantage is taken by the advisor by way of obscenely high ongoing fees to the point where most of the benefits end up in the advisors pockets instead of the clients.

Fee for advice makes sense the same way that an accountant or estate planner receives fees - paying for the advice only when their service is needed, and not tied to their assets under management, regardless of whether the benefit of that advice is ongoing or one-off.

John
October 30, 2020

Agree 100%. I recently went from a percentage ongoing fee to CommSec - wish I had done it years ago.

Alex
October 29, 2020

Really, wow, a financial adviser adds 5.2%. That's a stretch when bond rates are 0.8% and the market is fully valued and might deliver maybe 2% real over the next decade. So where does 5.2% come from when markets deliver 2%? Improving cash, for example, may come from taking more risk.

Tony
October 29, 2020

Hi Alex, i think you are missing the point of the article. Investing is a commodity. Behaviour and technical knowledge is not. Advising behaviour for investing and specific to circumstances adds value. Advising on technical wealth creation strategies such as tax structures, super rules, legislative changes, insurance, estate planning and cash flow adds value. The article quantifies this value. Measuring performance of investments is all you have done. But hey who needs an adviser when you can google information. I mean, thats what i do for medical advice and if gets really bad i go to the doctor.... Having a financial adviser is not for everyone. If you speak to an adviser, the initial meeting should demonstrate whether you have a sound financial house or not. The self-guided amateurs that think they have a sound financial house and know all the relevant information (but know they dont) tend to test the cheapest methods first. Being friends, family and google. I'm yet to hear someone say im soo happy i chose the cheapest option because its been the best value for money. You're not paying for a garden hose. You're paying for advice regarding your financial future.

SMSF Trustee
November 02, 2020

Agree. Although I've had a career in the investments industry, I still value financial advice in relation to my SMSF. I don't need advice on asset allocation, etc and don't have to pay for that (though my own views aren't necessarily better than a financial planner's views), but critical reviews of the managers I use are helpful and have led me to change from time to time. Most important, though, when the time comes to turn my accumulation phase fund into a pension-paying product, I'm going to get advice from someone who's job is to know the latest ATO and other rules so that I get it right. The potential cost of setting it up the wrong way is significant.

Hey, to those naysayers commenting here, if you have the time and interest to do all that research yourself, then great. But how about being a bit less bombastic as there are many people who have a life beyond their investment world and who need/value the guidance of a good financial advisor.

 

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