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:
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