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What do investors value in financial advice?

Challenged on one front by robots and on the other by a general reluctance among the wider public to pay for advice, some financial planners have been experiencing an existential crisis in recent years.

One obvious response among advice firms has been to fight the technology-led commodification of advice by going for scale, cutting costs and industrialising processes as much as feasible. A second response has been for advisers to stop and ask themselves exactly what it is that investors (or at least those willing to pay for financial advice) feel they value most from the human side of the service. A third response, and one pursued in a new global survey, is to ask investors themselves what they value.

The survey of almost 19,000 investors (clients of 436 participating firms in eight countries) by Dimensional Fund Advisers offers insights for firms reflecting on what they can offer and charge for beyond what’s available in an app.

Investment returns rank below security and peace of mind

The most notable outcome of the survey, which covered Australia, New Zealand, the US, Canada, the UK and Europe, was that investment returns rank well below other more qualitative factors for end investors. Asked how they primarily measure the value they receive from their adviser, investors’ most cited benefit was a sense of security and peace of mind, which was the top value among 35% of respondents. Second on the list was the adviser’s knowledge of their personal financial situation (23%), followed by a sense of making progress toward their goals (20%). Investment returns came in fourth among the key benefits at 14%. While all this might seem predictable at first glance, it’s arguable whether many financial planning firms really position themselves primarily in that light, as wealth counsellors and behavioural mentors.

While advisors may be tempted to promote their value as ‘generating good returns’, the real value they offer is getting clients to where they want to go. Returns are part of that, of course, but the advisor’s main value-add is keeping clients focused on the areas within their control. Promising ‘good returns’ only means having to explain when markets don’t deliver.

For instance, a financial plan that involves taking big risks in volatile assets whose ups and downs are more than the client can comfortably live with is probably not going to be a successful plan in delivering on the goal. In contrast, a plan that works within the clients’ risk preferences that allows them to sleep at night and that is built according to their own lifestyle and circumstances may be more successful, even if short-term returns are less eye-catching.

In other words, the destination is more achievable if the journey is tolerable. And that’s the value proposition for advisers that surfaced in this survey.

What can be controlled?

According to Dimensional’s co-CEO and Head of Global Financial Adviser Services, Dave Butler, the value that investors place on a sense of security is really an outcome of advisers setting the right expectations with each client. “By helping clients understand what they can and cannot control, advisers can create a different experience to help ease their concerns,” Butler says. The importance of the day-to-day experience also came through in answers to the question about what attribute investors consider most important in the adviser relationship. Of the survey sample, 31% cited the client service experience, while 26% said they ranked the adviser’s experience with clients like themselves.

With Australia’s superannuation system moving away from a lump sum to a retirement income goal, the survey’s findings were revealing. Asked to identify the most valuable retirement planning information they receive, 28% of respondents cited knowing how much they will be able to afford to spend each year, ranking ahead of the total amount they will have for retirement (22%). Correspondingly, the single most cited fear about personal finances was not having enough to live on comfortably in retirement (37%), followed by experiencing a significant loss in a market downturn (31%).

 

Jim Parker is Regional Director, Communications, for Dimensional Fund Advisors in Sydney. Dimensional has 12 offices in eight countries and global assets under management of AUD675 billion as at 30 June 2017.

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