How does a financial adviser add value?

The answer to this question is crucial if you plan on engaging with a financial adviser. What will he/she be able to do for you that you can’t do yourself? I’ll mention a number key areas below, which cover most areas, but I’m sure there are a few that are missing.

Behavioural Management/Coaching

Probably the most important and unrecognised value that an adviser can add. I’ve worked with hundreds of clients over the last 17 odd years and the majority of investment errors investors make are usually a lack of discipline (sticking to a plan), a cognitive error (hindsight bias) an emotional factor (market falling) or a combination of these.

A 2016 study by Vanguard (you can read it here), concluded that the greatest value added by advisers, in relation to wealth management, is behavioural coaching. Below is a chart from the report showing the breakdown of an adviser’s value with rebalancing, asset allocation, cost awareness adding value, but behavioural coaching delivers the biggest return.

Behavioural management, coaching or modification comes in a variety of forms. Creating a budget and providing guidance in sticking to it is probably the simplest form of behavioural management. Advisers who encouraging consistent and increasing investment contributions play a significant role in investors capital accumulation.

In helping clients develop positive spending and investing habits, we also help clients overcome various behavioural biases that derail their investment portfolios. The Dalbar Study has researched investor behaviour in the US for over 25 years. For the 20 years ending December 2016, the S&P500 has delivered a return of 7.68%, whilst the equity investor generated a return of 4.79%. This is largely a result of investors chasing past performance, market timing and abandoning markets after a decline. This difference in return is known as “The Behaviour Gap”.

By working with an adviser, who understands and incorporates behavioural management in their business, you will be far better suited to handle market volatility and periods of low or negative returns. You will have an investment strategy in place and will be able to revert to your plan during periods where you are doubting yourself, your adviser and the markets. Creating and sticking to a plan is crucial to you being a successful long-term investor.

Planning

Financial planning and goal setting is an ongoing process. You never get to “the end” and your financial plan will never remain the same. You and your adviser should build a set of goals and objectives and then work towards the achievement of these goals-which will change over time and the plan will be updated and tweaked. Retirement and insurance planning, estate and tax planning are also areas that may be considered and planned for if appropriate.

Without a plan or set of goals and objectives, how do you know if you are on track or not?

Investors have trouble establishing appropriate, realistic and manageable goals. Often they don’t know what they should be concerned with or how to go about accomplishing what they want.

Advisers have experience and expertise in helping clients manage their financial lives by creating plans and providing ongoing monitoring. Often there isn’t anything that needs to change for a number of years, whilst in other years there are several changes that need to be made to your plan annually.

Drawdown strategy

Outcomes can be optimised if an adviser considers a dynamic withdrawal strategy, updated based on market performance and expected investor longevity. Withdrawal sequencing from taxable accounts first, managing Centrelink income as and when required add further value to clients.

Managing costs and fees

Costs and fees on investments play a significant role in investment success. All investors need to take costs into account and an adviser plays a key role in identifying the costs involved with clients portfolios-as well as explaining them.

Portfolio rebalancing

A simple rules-based rebalancing process takes the emotion out of the decision of when to rebalance to be inline with your risk tolerance. If there isn’t a system in place, it’s easy to revert to market timing as opposed to rebalancing at predetermined times.

Education

Advisers should be a source of education for their clients. This empowers clients to be able to make smart, informed decisions and helps them understand the strategy and portfolios.

Time

Are your will and estate planning up to date? Have you put in place the appropriate levels of life, disability and trauma insurance? Are the correct beneficiaries and guardians for the kids nominated and is the cover still cost-effective? When last did you review your mortgage interest rate?

There are only so many free hours in a day. We can’t all be experts in everything and unless your hobby and skill lie in finance, it is unlikely that you will have the time and ability to constantly monitor yours and your family’s financial affairs.

By working with a financial adviser you are able to reduce the time spent on your finances to the planning meetings-maybe 2-3 hours a year. Your financial adviser takes on the responsibility of looking after your best interests for the rest of the year. You get to focus on your work, family and downtime.

Accountability

We’ve all set goals and plan for the future, especially at the start of the year, only to fall short a few months later. Often it’s the result of a lack of accountability. It’s the reason the best sports players have coaches who hold them accountable and make adjustments to their games.

A study in Canada, the Value of Advice Report 2012, found that investors who worked with advisers for over 15 years, accumulated 2.73 times as many assets as those who didn’t. The study also highlighted that the longer the relationship, the great the impact which also shows that financial advice is not a once off event but rather a long-term relationship.

Nobel laureate Daniel Kahneman’s book, Thinking Fast and Slow begins as follows; “The premise of this book is that it is easier to recognise other people’s mistakes than your own”. Think of Buffet and Munger or Lennon and McCartney, we all tend to work better with help, advice, guidance, correction and accountability.