The value of an adviser 5.2% pa: Why it’s higher than ever

An adviser’s value was never more obvious than during 2020.

It was a year that challenged us all in so many ways. Financial markets fell sharply early in the year, when the global spread of the COVID-19 virus forced a sudden shuttering of economic activity, only to recover strongly. Those investors who followed the advice of advisers and stayed in the market tended to fare well.

Most financial advisers had further challenges, as they had to switch to a virtual environment seemingly overnight. For many, harnessing the available technology was a steep learning curve.

That’s why we think it is the perfect time for you to place a sharper focus on the full value of your advice and communicate that value to your clients.

The data clearly shows that the value is much greater than the typical ongoing advice fee. 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.

The report shows that an adviser charging an advice fee of $3,250 to a client with a $250,000 balance can potentially deliver $13,250 of value – that’s $10,000 extra value to the client.

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 – 1.1%
• 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 – 2.0%
• 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 – .6%
• 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 – Priceless.
• 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 – 1.5%

Total = 5.2% p.a

Of the elements quantified, 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 annum of additional value for their clients’ portfolios.

“The 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” said Neil Rogan

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.

Tax effective investing was the next biggest contributor, representing 1.5% 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