Financial advisers still deliver value of 5.2 per cent pa or more for clients, despite challenging times
Advisers deliver value of 5.2 per cent pa or more each year to their clients in a relationship that extends well beyond investment-only advice, according to Russell Investments third annual Value of an Adviser Report, aiming to quantify the value that advisers provide throughout a client’s investing journey.
The report 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 expert knowledge in additional wealth management services.
Russell Investments Director, Head of Business Solutions, Bronwyn Yates says: “We believe advisers have never been more valuable than during this challenging time. The pandemic has further strengthened the awareness of the value that advisers provide for their clients.
“We know some clients can experience sticker shock when they see advice fees for the first time. Our report shows that an adviser charging an advice fee of USD3,250 to a client with a USD250,000 balance can potentially deliver USD13,250 of value – that’s USD10,000 extra value to the client. Our report aims to helps advisers move beyond a fee conversation and amplify their value creation capabilities.”
Russell Investments developed the following formula to help advisers understand and communicate the full value of their services: A+B+C+E+T = value of an adviser. The formula is explained in the detailed report as follows:
A is Appropriate asset allocation. Helping clients to work through their values, preferences and motivations from the outset.
B is for Behavioural mistakes. 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. 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. 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. Advisers play an important role in a client’s tax journey, helping them navigate key components when it comes to tax-efficient strategies.
Of the elements quantified by Russell Investments, an adviser’s ability to help investors avoid behavioural mistakes, such as chasing short-term market volatility or chasing past performance, was the largest contributor, adding at least 2.2 per cent per annum of additional value for their clients’ portfolios.
“Our report shows advisers can play a critical role in helping investors avoid common behavioural tendencies and may potentially help their clients achieve better portfolio returns than those investors making decisions without professional guidance,” says Yates.
Russell Investments also observes that during the pandemic, many investors were fearful of loss as markets fell that they switched predominantly to defensive assets, or entirely to cash, just prior to the market hitting its March 17 low, locking in substantial losses.
The report estimates that for someone with an investment balance of USD250,000, selling to cash on March 16 would have locked in losses of more than USD50,000 versus a member with the same balance who stayed invested during the volatility, recovering almost USD20,000 already by the end of May.
Tax effective investing was the next biggest contributor, representing 1.5 per cent of added value. While tax is often considered the realm of the accounting profession, an adviser can also provide expertise on managing and optimising investment tax for their clients.
Advisers can add significant value to a client through structural tax strategies to manage investment tax. This not only requires a close understanding of the client needs, but also knowledge of new innovative investment solutions that can help manage personal tax circumstances – such as managed account solutions.
In 2019, Russell Investments launched a ‘next generation’ suite of multi-asset, managed accounts. Russell Investments Head of Wholesale Partnerships Neil Rogan said managed account solutions allow advisers to tailor an investment solution based on the taxation circumstances of an individual. The efficiency of managed accounts also allows advisers to spend more time engaging with clients.
Rogan says: “While dedicated advisers are confronting challenges as volatility whipsaws many investors’ savings, they also need to articulate that the value they deliver goes far beyond selecting and managing investments. By demonstrating to clients how the value they deliver exceeds the fees charged, advisers can improve client engagement and satisfaction at a time of extreme market uncertainty.
“We want advisers to know we stand with them during this unprecedented time and we believe advisers have never been more valuable.”