Quality financial advice added more than 5 per cent to client portfolios during the year, according to the latest annual analysis by Russell Investments Australia.
The Russell 2021 ‘Value of an adviser report’ found advised client portfolios were on average 5.2 per cent better-off than DIY investors for the period.
In its fourth yearly study, Russell found financial advice offered quantifiable portfolio benefits based on four factors: asset allocation; behavioural coaching; cash optimisation; and, tax-effective planning.
As well, the study rates a fifth financial advice quality – expertise – as “priceless” given advisers are more than “purely investment managers, whose only job is to select investments and achieve a certain level of return”.
While expertise may be a nebulous concept, the Russell report says it includes adviser skills such as “effective communication, client understanding, emotional intelligence and behavioural awareness to name a few”.
“A few recognised benefits of this expertise includes education, engagement, efficiency and enrichment to a client’s financial and personal well being,” the study says.
But of the four advice factors clearly impacting client returns, Russell says ‘behavioural coaching’ provided the biggest portfolio boost, adding about 2 per cent relative to unadvised investors.
“Given the volatility seen in 2020, it’s no surprise that the biggest contributor to adviser value is… as a behavioural coach,” the report says. “In fact, this category on its own could offset the fee that many clients may pay. However there are many other opportunities to highlight the imbedded skills, expertise and insights that a relationship with a financial adviser can provide.”
Tax-effective planning supplied the second-largest value-add to portfolio returns of 1.5 per cent followed by asset allocation (1.1 per cent) and cash optimisation (0.6 per cent).
In a statement, Russell Australia head of business solutions, Bronwyn Yates, said: “Investors who have been educated by a financial adviser understand there will be ups and downs along their financial journey, so they feel comfortable in staying the course.
“However, non-advised investors sometimes fail to make the correct decision when markets are volatile, and often incorrectly time their exit and subsequent re-entry to the market. This is an issue which plagues both those with loss aversion, and those convinced they can beat the market. It’s also a timely consideration for the growing ranks of millennials and Gen Z turning to ‘finfluencers’ as their source for financial advice.”
While Australian advisers face different circumstances than their Kiwi counterparts – especially around tax and superannuation – an inaugural NZ version of the Russell value-of-advice study in 2019 reported similar results.
Using a slightly different formula, the Russell NZ ‘Value of an adviser report’ also put the annual outperformance of advised portfolios at 5.2 per cent with the “cost of getting it wrong” representing 2.9 per cent of the gains relative to the average DIY investor.