Like everyone, I have been at a few social gatherings and barbeques over the years where the “what do you do for a job” question comes up. When my response is that I am a financial adviser, it is often met with an array of responses. Unlike some clearly defined occupations, our is often misunderstood. The common misconception is that we just do investing – share trading, portfolio construction, investing, product selection and so on. While investment management is certainly a key component, there is so much more to advice than just this.
To be fair to those who ask the question, the narrow scope that I outlined above is exactly what some “advice” firms do. Focus on products and investments – not the big picture. These advice firms will spend the initial meeting telling clients how smart they are, how good their products are, how wizz-bang their portfolios are, outline their percentage based fees on funds under management (your monies) and after talking for what seems to be an eternity, ask if you have any questions. In most cases, the portfolios are expensive, the advice fee are expensive and we all know (because the data doesn’t lie) that market returns do the heavy lifting anyways. Unfortunately, for their clients, thats putting a wrapper around an off the shelf investment solution and charging a fee for it.
So how do we do it…? Welcome to Independent Wealth Partners. I’m Tim. Let me put some context around today’s discussion and give you a 30 second commercial break about our business. For the next hour and a bit, we want to hear about you. What’s important to you, what issues are you facing and what are some of your big picture goals, dreams and aspirations? What drives you and what gives you purpose? Once we know this, let us financial nerds do our thing. Once we’ve built the strategy, let’s make sure it stays on track and you have the best possible chance of achieving all that is important to you. Sound good? And yes, probably not what you were expecting I know…
Now, it’s all well and good to say this – but is it actually true? Do financial advisers generally add value to people’s worlds or not? Russell Investments recently released their annual report which shows that they do. For us, we are already well aware of the tangible benefits of advice because they can be easily measured through statistics. For example:
- A person’s confidence doubles after they receive advice. 83% of clients felt confident in achieving their goals after receiving advice compared to just 41% prior.
- Despite average advice fees rising by 15% over the past 12 months, 90% of clients rate their adviser’s value as good or excellent.
- Advisers add 5.5% per annum in value. This doesn’t mean solely higher investment returns – this is delivered through asset allocation, behavioural coaching, tax planning and smart decision making.
- Advisers stop clients making mistakes with 78% of advisers being able to clearly highlight how they have stopped clients making financially irresponsible decisions.
- Reassurance is important. 43% of clients admitted that just having someone to lean on and provide reassurance when faced with an important life decision was critical to them.
Like I highlighted, there is no doubt there is measurable value in what financial advisers can provide… and not just in investment returns. On this front quickly, it is important to note that there is investment returns and there are fees. While no one can guarantee higher returns, fees can indeed be quantified easily. If you have an adviser charging and 1% portfolio fee (certainly not uncommon in our industry) and a portfolio with an average investment fee of 0.8%, that’s 1.8% in fees before the year has even started. You are behind the eight ball already. I mentioned earlier how the data doesn’t lie either – high cost, actively managed portfolios rarely win against low cost, passive focused portfolios over the long-term – and the cost of these would be roughly half if not lower than the above too. In summary, unless the adviser running an actively managed portfolio is beating the market by circa 15-20% (a ridiculously high bar over the long-term), you won’t be winning once fees are taken into account.
Anyways, getting back on track, what people fail to see when seeking advice is not just the tangible benefits. It’s the intangible ones which matter just as much. We commonly get asked this question – “what will I get back for the fees that we pay?” Inevitably, this leads back to the will I get a better return framing mentioned earlier in some cases. From our end, this is a very fair question – and one that is certainly valid. Our response is generally focused on the intangible side of things because this is what our clients tell us matters. Some examples of this include:
- Being accountable to achieving all that is important to you. A plan is great but having someone keep you accountable to this and adjust course where needed is critical. At the end of the day, they are your goals and aspirations so what price do you put on these being achieved…?
- Life is far easier to navigate when you feel confident and in control, as opposed to nervous and stressed. Financial advisers play a critical role in providing confidence and easing stress when circumstances change – which they do in almost every person’s world at some point in time. Life events, career changes, legislative changes and so on.
- The world is only becoming more complicated, and clients are juggling competing goals as a result. A classic example we see is someone planning for their retirement whilst still trying to help their kids get ahead. Having someone who knows your world intricately can help navigate this. As I often say, we are the non-emotional person in the room – understanding the situation just as much as the client but without the emotional attachment to the decision making process.
- Trust compounds like returns. Clients rank trust as one of the most important attributes (the most important for some generations) and the only way to build trust is through a long-term relationship.
- Artificial intelligence (AI) is sweeping the world but it’s not human. While I am not saying AI won’t add value to a client’s world by any stretch, having a human to support you through good times and bad (as well as being able to separate truth from fiction) is critically important given the impact just one bad financial decision at the wrong point in time can have.
The final thing I would add to the above is this. As a practice who cares deeply about our clients and how they are feeling at all points in time, we get clients to complete a ‘Life Survey’ on a regular basis. As per the article Cam and Chris wrote back in May, clients who have worked with us regularly report a higher wellbeing score in every key area we measure – not just financial wellbeing. Clients are more connected to their purpose, their world, their careers and much more. I suggest reading the article if you want more details on why we feel there is so much more value that can be added beyond just the traditional belief of investment returns.
All in all, I hope this article has highlighted that the value of advice is so much more than just investment returns. If I was a potential client reaching out to a financial adviser, there is no doubt that understanding the fee structure is an important consideration. However, rather than focusing on what level of return I am going to get for the fees that I pay, I would strongly encourage you to reframe the question. Rather than what level of return you are going to get, ask what value you are going to get. Value can be perceived in many ways but this is where the answer lies. What if engaging a financial adviser gave you a much better chance of achieving your goals and aspirations, gave you more confidence, reduced stress, stopped you making mistakes, provided reassurance through good times and bad and above all else, put a trusted person in your corner for the long-term. To me, that is the value that matters – not just the chance of a higher investment return.