According to research conducted by Russell Investments, a financial adviser can add more than 5% to a client’s portfolio. They also found New Zealand advisers add more value to their clients than advisers in the US and Australia.
An adviser adds value by defining a client’s investment strategy, risk tolerance, goals and objectives, and helping them avoid making mistakes.
Is a financial adviser worth the cost?
Many investors wonder whether using a financial adviser is truly worth the cost.
Put simply, a financial adviser charges you a fee in order to make you more money. Surely, just following the news and understanding your own investments would mean that you could keep that fee for yourself whilst still making money, right?
The answer depends on a number of factors. Broadly speaking, the main things you achieve by onboarding a financial adviser are:
- Good financial planning
- Good financial decision making
What’s involved in good financial planning?
While you may be able to figure out how much and where to invest in order to gain a good return, the end goal of good financial planning goes well beyond choosing investments. An adviser will consider a number of factors in line with best practices, which include:
- suitable asset allocation with broadly diversified investments
- focus on low-cost investments (low expense ratios)
- locating assets properly in taxable and tax-advantaged accounts
- focusing on total returns investment instead of income investing
- rebalancing to the strategic asset allocation
- deciding where to draw assets from (tax-deferred or taxable) to meet spending
- providing support to stay the course in times of market stress
How does a financial adviser add value?
A good financial adviser adds value in 3 quantifiable areas:
1) Getting it Right (2.9%)
In the US, Russell’s research showed that the average share investor’s inclination to chase past returns would have led to underperformance compared with the market return.
“From December 2007 to December 2018, investors withdrew more money from US stock mutual funds than they put in. All the while, $100 invested in the Russell 3000 Index more than doubled in value. Those who chose to stay in cash during that period missed a cumulative return of more than 200%, based on the Russell 3000 Index.”
2) Avoiding Behavioural Mistakes (1.9%)
An adviser can help to avoid investor biases and behaviour that can cause mistakes like withdrawing after a market correction or being influenced by attention grabbing headlines in the media resulting in over-reacting to market events.
“We believe an adviser’s ability to help clients stick to their long-term financial plan and skirt irrational, emotional decisions adds this value. It is perhaps the key reason why we are such strong proponents of financial advice,” the Russell report said.
3) Rebalancing (0.4%)
The report said that portfolios that were not rebalanced regularly, at least once per year, could end up with significant and unintended risks. Rebalancing added value and also reduced volatility (variation of return) by around 1%.
What other ways can an investor benefit from using a financial adviser?
While research strongly supports the use of financial advisers, there are other ways that they can add value which are more difficult to quantify.
First of all, they add the intangible value in making the process of investing simpler. This gives you peace of mind that your investments are being managed effectively.
Because cognitive abilities and decision-making can deteriorate as a person ages, post-retirement investors and their families can rest assured they have a trusted person on side to ensure their choices are backed by sound strategies.
A trusted financial adviser will take the pressure off loved ones if the primary financial decision-maker passes away.
If a household has one person who primarily manages the finances and that person passes away, the surviving household member who inherits this responsibility doesn’t necessarily have the knowledge or experience to make the right decisions.
It is our role to make investing simpler, more disciplined, and to give you peace of mind.