Good financial advice has left client portfolios better off by at least 4.3 per cent this year, according to the latest Russell Investments annual estimate.
The local 2022 edition of the long-running Russell ‘Value of an adviser’ series, says asset allocation advice and behavioural coaching added 1.4 per cent and 2.9 per cent, respectively, as clients battled through turbulent markets.
“In periods of steadily rising markets, it can be easy to underestimate the value of a professionally managed portfolio,” the Russell study says. “During these periods, we often see the asset allocation of DIY portfolios drift away from the initial asset allocation. A disciplined approach to portfolio management and rebalancing can ensure it retains its original asset allocation—and therefore remains appropriate for an investor’s stated goals—while also potentially reducing risk.”
But while advisers can add considerable value by appropriate and managed asset allocation, the report says helping clients avoid big mistakes – such as selling out in market downturns – might offer even greater returns.
“… investors often buy when markets are euphoric and sell when markets are bearish,” Russell says. “We believe there is good value in your ability to help clients stick to their long-term financial plan and avoid the behavioural mistakes that may have them miss out on the market’s best days.”
For example, during the 10 years to the end of this July, investors who had remained invested in the NZX top 50 index over the whole period would’ve more than doubled their money.
However, if market-timing saw investors miss even 10 of the best days during the decade in question an initial portfolio of $100,000 would’ve grown to only about $170,000 compared to almost $237,000 for fully invested client.
Based on analysis by Russell and Refinitiv DataStream, the average retail return ‘chaser’ would’ve earned an annualised 6.16 per cent over the 20 years ending December 2021 against more then 9 per cent by just staying invested in the S&P 500 index – the 2.9 per cent differential explaining the value of behavioural coaching.
The Russell value-of-advice figures are, of course, approximations but the report says advisers also help clients in ways that are even harder to quantify such as resolving complex “choices and trade-offs” and applying broad expertise.
“Every client has a unique set of circumstances, preferences and considerations, which increase in volume as they age, and in complexity as their needs and experience develop over that time. The sheer number of decisions to be made and the knowledge required to understand their implications can lead to decision fatigue and increases the risk of poor outcomes,” the report says.
“… We consistently hear and see examples of advisers that simultaneously bring their technical and emotional expertise to the benefit of clients.
“In the best of times, advisers help clients achieve life-long goals, and celebrate personal and family milestones along the way. In challenging times, advisers can really add value through cases of trauma, illness, financial crises, estate planning and death. We believe this unique combination of technical skill and emotional expertise demonstrated by advisers provides a priceless form of value to their clients.”
Russell launched the value-of-advice study in the US in 2014, later adding versions in other jurisdictions including Australia and NZ.