Good financial advice can add more than 5 per cent each year to the wealth of NZ investors, a new Russell Investments study has shown.
The Russell ‘2019 Value of an Adviser Report’, released at the SIFA Christchurch conference last weekend, is the first NZ iteration of a similar report the firm has published in the US and Australia for several years.
“… we have examined the various components of the typical Kiwi adviser’s wealth management value proposition and estimated that this amounts to more than 5% value-added per year to their clients,” the Russell study says. “It may be significantly more than that for those clients who would not otherwise have an investment portfolio were it not for their relationship with a financial adviser.”
Russell based its 5 per cent plus value-of-advice figure on three fundamental services provided by investment advisers covering: annual rebalancing; preventing client “behavioural mistakes”; and, the cutting the “cost of getting it wrong”.
Of the three advice components, Russell rates the ability to help clients into the most appropriate investment strategy as the most valuable. By this measure, the ‘cost of it getting it wrong’ amounts to 2.9 per cent each year, the study says.
“What is clear from our analysis is that financial advisers have the potential to add significant additional value to an investor’s portfolio over the long-term by helping clients to work through their values, preferences and motivations from the outset,” Russell says. “For investors who elect to proceed without advice, there can be a big price to pay for holding an inappropriate portfolio.”
At the same time, correcting well-known behavioural biases in investment decisions can add an average 1.9 per cent each year to clients’ wealth while disciplined annual portfolio rebalancing techniques are worth another 0.4 per cent annually, the paper says.
All up, the Russell research says the three advice factors could contribute an annual 5.2 per cent to client value, which is a “meaningful differentiator in a time of regulatory scrutiny and challenging market environment”.
Furthermore, financial advisers could add unspecified value by coaching clients to understand “complex investment issues”.
“There is great value in teaching investors how to make the complexities of financial planning, goal-based advice and multi-asset investing strategies simple enough that they will actually want to be a part of helping you help them,” the report says. “In turn, this can create trust, simplicity, candor and confidence in the value advisers deliver.”
The paper, delivered by Russell NZ chief Alister Van der Maas at the SIFA event, says as the local industry faces a wave of new regulations, higher compliance costs and relentless pressure on fees, the value of advice needs to be better-promoted.
According to the report: “The focus on fees is a daily conversation in our industry and the regulatory environment continues to evolve with emphasis on transparency, simplicity and value for money…
“…We believe adviser value far surpasses the typical amount charged in fees. We think an adviser’s clients should also feel this way.”