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Pinpointing where the true value of financial advice lies

It’s a crucial aspect that investors and advisors generally don’t – but should – agree on.
Financial advisors have been selling themselves short for decades by offering ‘free’ advice and only charging when a client takes out a product. Picture: Shutterstock

Many investors baulk at paying for financial advice. They argue that there is no need to pay someone to do something that you could do yourself.

Yet a number of studies suggest that advice has a measurable value. Investors who have a financial advisor are, on average, better off than those without.

The obvious question this raises is what a financial advisor should be doing. What is the value that they can – and should – offer that would justify charging for their services?

Asking questions

At its recent Investment Conference in London, Morningstar released a new piece of research that looks at this question from a novel perspective. The company asked just under 700 investors what they valued in a financial advisor, getting them to rank 15 attributes from most to least important.

They then repeated this exercise with 161 advisors, asking them what they thought investors most valued from a financial advisor. Finally, they compared the results.

Perhaps unsurprisingly, there was a fair amount of misalignment between the two sets of responses. What investors value and what advisors think investors valued did not line up all that well, as the following graphic illustrates:

Source: Morningstar

For Ryan Murphy, the lead researcher and head of decision sciences at Morningstar, this raised a few significant issues. The first was positive, in that investors and advisors agree that one of the most important things an advisor can do is help their clients to reach their financial goals.

What’s it really about?

“This is consistent with my understanding of why people invest, and provides the right benchmarks to determine whether investors are succeeding,” says Murphy. “Goals matter to investors, and advisors recognise this.”

However, this finding conflicted somewhat with what investors ranked as fourth most important: an advisor’s ability to help them maximise returns. Advisors, for their part, didn’t think that investors saw this is important at all – it was second last on their ranking.

“This, I think, is a potential misunderstanding that could be sowing the seeds for heartache,” says Murphy.

“A plan that is going to get people to reach their goals is not necessarily going to maximise returns. That’s worth having a conversation about because I think people are confused about how these two things relate to each other.”

Unfortunately, advisors themselves have probably been largely responsible for creating this issue. Together with the asset management industry, they have historically marketed themselves on their ability to deliver the best possible returns for investors by picking the top performing funds.

This is, however, an area where the value they can actually add is somewhere between minimal and negative. That being the case, they have also eroded trust in themselves because they have sold something they are largely unable to deliver.

This is why many investors disregard the value of financial advisors. They know that if all advisors are offering is fund-picking, then, with a little bit of self-education, they genuinely could do it themselves.

Behaving badly

Unfortunately this also relates to a second problem, which is demonstrated in what investors voted as the least valuable contribution that an advisor can make: ‘Helping me to stay in control of my emotions’. Advisors also recognised that this is not high on what investors are looking for.

Yet this is the area where advisors can probably add the most value.

“What are the factors that contribute most to the success of an investor?” Murphy asks. “It’s their savings rate, and their tenacity; their ability to stick with it over the long term. And good financial advice – good behavioural coaching – can contribute to both of those.”

Helping people to continue to save and stick to their plan when it is hard to do so has a material benefit. A number of studies suggest that guiding investors away from falling victim to their own doubts and biases may be the most valuable impact that advisors can make.

Read: This is how much your investment behaviour is costing you

Morningstar’s research, however, suggests that investors aren’t aware of this. Perhaps the most likely reason for this is that they don’t know that this is something that advisors offer.

That is the fault of the industry. Financial advisors have sold themselves short for decades through practices such as offering advice ‘for free’, and only charging when their clients take out a product. If they are prepared to give something away for free, why should anyone else think that it has any value?

Financial counselling is, however, genuinely the one thing that investors can’t do for themselves. By definition, investors would never fall prey to emotional and cognitive biases if they could rationalise their own behaviour.

Advisors can therefore add enormous value by being the independent, objective voice of reason that helps investors avoid the mistakes these biases lead to. To be able to do that, however, they have a lot of work to do in getting investors to understand why it is valuable.

“You could say that people just don’t get it; they are irrational,” says Murphy. “Or, more likely, we haven’t done a good job of communicating this value.”

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Can someone explain why the advisor is paid a percentage of the value of the investors portfolio and not for the specific advice he gives

Not all advisers charge a % of AUM. Some charge a flat fee or retainer for work undertaken, advice given and services rendered. Some charge by the hour. Some earn gross upfront commissions (to be avoided in my opinion).

In any event adviser fees should be clearly communicated and discussed, they should be transparent, easily understood, and should support the alignment of interests between adviser and client, before being agreed upon.

There are many different advisers out there; it’s important for individuals to do their before signing up.

To answer your question, you need to view your fin advisor’s annual IRP5 tax certificate. You will notice the bulk of income is reflected under source code “3606” 🙂

SARS code 3603 is for Commission.

Unfortunately you’re not just paying for the advice of one committed individual – you’re paying for bulk advice based on the “house view”. It’s a little like Brexit, where the members of Parliament don’t agree so the loudest gets his way and no one needs to take responsibility for a bad decision.
If you’re taking the risk – make your own decision, why pay someone else to do it for you.

What if the house view is that of one or two or three committed (suitably qualified and experienced?) individuals?

If you’re taking a risk, why not take advice?

People/investors don’t realize what ‘Risk’ is. The think they stand a chance of losing all their money.

Fee-based advice is clearly the way to go but investors also need to be clear on what the want from the engagement – you don’t go and see a doctor without a clear purpose and expectation of outcome…and if you do, mea culpa!

AUM versus hourly advice fee versus retainer fee versus commission based charging structures should all be viewed under the same magnifying glass…. what suits my needs and what gives me the best value for money and creates the best future outcome for me and my loved ones…

Before you bash anyone for charging structures ask yourself this….”Can I do this job competently myself?” If the answer is yes then ask yourself “Do I have the spare time to invest to be able to do this myself? If the answer is yes then don’t pay anyone else. Pretty simple really.

If the answer is no to either question then ask what service you need…

If you want someone to simply put a solution together which you then leave on auto-pilot for 30 years then pay a hourly rate and manage it on your own thereafter. The hourly rate route is likely to be offered by an independent advisor who does not earn money based on selling product and the upfront commission is likely to be offered by an agent of a large insurer who is selling you a product. You decide which one you rather deal with in terms of getting to a better outcome for yourself. Also note that when you go back wanting further input you should expect to be charged at the hourly rate again…

If there is no value to you of having someone available to engage with on an ongoing basis then don’t pay for it (there goes AUM and retainer fees).

But bear in mind that the solution you are given on an once off auto-pilot basis is not going to look the same as one where there is ongoing input…

The reality of the matter is that the ability to add value on an ongoing basis depends not only upon your requirements (complexity) and preferences, your time horizon, need for cashflow management (draw-down strategy) but also on the market conditions and current valuations…

Pay only for what you need and value is the bottom line…

End of comments.





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