A recent US study has tried to quantify the value of financial advice. Although the maths are methodology are a bit spurious in places, it made interesting reading and is probably equally as valid here in the UK. The bottom line: it estimates that the value of advice is around 4% a year.
The premise seems to be that advisers add value with (A) portfolio re-balancing and (B) stopping behavioral mistakes (e.g. discouraging clients from panic selling when markets fall). Coupled with the (C) value of investment advice and (P) financial planning (I found these two assumptions harder to comprehend) the study says the value of advice is A+B+C+P = about 4% a year. If you want to read in more depth the article is here.
While I take such studies and figures with a pinch of salt, the value of advice is a question we ask ourselves with every potential new client we speak to. Are we adding value and is that value greater than the additional cost of using us?
The most interesting part of the study for me is that it suggests the greatest value potentially added by an adviser is from ‘behavioral’ coaching. That is, helping people sees things clearly and make good, rational and informed decisions.
It should be the easiest bit, as aren’t we all rational after all?
Well, when it comes to our money many of us are definitely not. Whether it is holding on to the share that has nose-dived in the hope it gets back to where it started, getting over excited by the last article you read and being over (or under) whelmed and reacting to recent performance figures, it is actually much harder than you might think for people to make consistently sensible decisions.
Justin and I used to joke that we couldn’t keep mentioning ‘time in the markets, not timing the markets’ one more time. Now we’ve learnt that we can’t say it often enough. Say it, say it again and then repeat. And even then it gets missed.
One of our biggest lessons to date came towards Christmas 2015. It had been a rotten 9 or 10 months for investors, a constant trickle downwards. We weren’t worried, years of experience meant that we just accepted this as part of the journey and we had been as clear and upfront as it was possible to be before anyone became a client. Everyone knew what to expect. Only they didn’t.
I started encountering murmurings of disappointment from clients – yes with the markets but also with us for not doing something. But we’d done all we sensibly could: diversified portfolios, cash safety nets, absolute clarity at outset, annual reviews etc. In fact, our reaction was also a little emotional. We felt slightly hurt that people didn’t realise what a good job we were doing and had forgotten everything we had told them (yes financial advisers have feeling too …well some of them).
But then we thought about it a while and realised that it was completely our fault. We’d forgotten just one thing – but it was a very important thing. To keep on talking and telling. To discuss the things affecting their money and, most important of all, reassurance. It is something we have paid special attention to since but it proved as a valuable reminder that the emotional side of investing is huge and a big part of the job is the handholding, comfort and perspective we can provide.
I digress, so back to the value of advice. We only ever take on a new client where it is absolutely clear we are adding value. And the great news with us is that, on many occasions, we are also saving people money as well. For starters, we don’t believe in charging anything like 1% a year to act as someone’s financial adviser. Our maximum annual fee is 0.6% but we cut it for higher amounts so that it is always fair and reflects the work involved – most of our clients pay a lot less than this.
We take a similar approach to platform and fund costs. We use low cost no-frills platforms where it makes a material cost saving, avoid the extra costs of external discretionary management services, multi-managers or fund of funds and when we look at which funds to hold we always have cost in mind.
We are very deliberately not a ‘robo-adviser’ adviser or online investment management service. People are not spreadsheets and that is not where the value is. The value comes from having the technical ability to understand markets, investments, tax, pensions, ISAs etc. and having the experience and training to help people make good, rational financial planning decisions. And being to hold their hand through all the uncertainties and financial trials and tribulations that go hand in hand with investing and life in general.