Much has happened in the financial services industry following the 2018 Banking and Financial Services Royal Commission – many of the recommendations strengthening consumer protection laws have been implemented and as a result, the wealth management industry as a whole looks very different to what it was pre-Royal Commission.
The advice industry has been a key part of that transformation. The major banks, once leading players in providing financial advice, have or are in the process of withdrawing from the industry, driven by the reputation risk coming out of the royal commission and the increased regulatory focus.
But one of the downsides of the reputational damage stemming from the royal commission findings has been the loss of confidence in the value of getting advice. And as a result, there is an expanding "advice gap" in the Australian market, being compounded by the move by many professional planning firms upmarket to serve high net worth individuals. At the same time several thousand advisers have exited the industry.
Just like how some of us choose to embark on a fitness journey on our own and are able to set our own goals and achieve them through sheer discipline and willpower, there are an equal if not greater number of us out there who would benefit from having the support and encouragement of a fitness coach. The same applies to the wealth building journey.
The value of a financial adviser
Proprietary research by Vanguard titled Adviser's Alpha estimated that financial advice improved net returns by 3 per cent. Coined by Vanguard's US business in the early 2000s, the adviser's alpha term refers to the real value of financial advice, interpreted as a value more than just a return on the investment statement that has outperformed market benchmarks. It is a wealth management framework that highlights the value of good strategic financial advice beyond just investment selection and provides strategies that advisers can use to bolster their services and further define a unique value proposition.
Advisers leaning on this framework are encouraged to shift their value proposition away from trying to pick best performing investments. Instead, it suggests expanding their role to that of a wealth manager and behavioural coach; someone who guides clients through an investment journey that is likely fraught with emotional ups and downs.
The value of a financial adviser as a behavioural coach was perhaps best illustrated in 2020 when the financial regulator, ASIC, issued a cautionary report about the increase in trading frequencies amongst retail investors. According to ASIC, up to 5,000 new accounts were opened daily on retail brokerage platforms in February-April 2020. These new investors also held on to their securities for only one day, less than the 4.5 day average in the year prior. What's more is that up to 80 per cent of these investors made losses through their speculative behaviour.
The owners of those new trading accounts would likely have benefited from the experience and stewardship of a good financial adviser. Perhaps they would have been advised to invest for the longer term and encouraged to hold on to their securities for longer than just a day. And as a result, perhaps a figure much lower than 80 percent of those new investors would have suffered losses.
Data clearly shows that investors who sold during the March 2020 market low have missed out on more than a 50 per cent return since. As markets have completely recovered from that dip, and are on track to reach the previous high recorded in mid-Feb 2020, those who stayed invested would have recouped their perceived losses from March 2020.
Indeed, left alone, most investors often engage in behaviour that is more akin to gambling than investing, thereby risking their ability to grow their wealth in the long term.
But beyond the balance sheet and emotional coaching, there are a few more reasons for why anyone looking to build their wealth should seek out a good financial adviser.
Tailored to suit needs
Many of us took to relying on online instructional videos or live streams to help us exercise in our living rooms or garages during lockdowns last year. But instructional videos can only provide general guidance, as opposed to a personal trainer who could point out an incorrect posture or help adapt an exercise for a specific injury. Similarly, a client seeking advice from a good financial adviser, instead of relying on general advice gleaned from the internet and social media, can expect to be presented with a financial plan that is tailored to their needs. A good financial adviser will take the time to understand their clients' circumstances and work to define goals that are short, medium and long term, and unique to their client.
While any financial adviser dispensing personal advice is now legally required to fact find, and provide a fee disclosure agreement, statement of advice and record of advice, a professional financial adviser will create a plan that balances a client's risk profile alongside their goals, and construct a portfolio based on that profile. Knowing that a specific asset was chosen as part of a well-considered strategy that is balanced and diversified can often help quell the inevitable anxiety that surfaces during particularly volatile periods.
Technology, tools and knowledge
The other benefit of seeking out financial advice is gaining access to adviser technology and tools that can accurately model various financial scenarios in an effective manner. Many financial advisers often invest in a digital toolkit to help them simplify the delivery of the more complex aspects of financial planning. For instance, using a forecasting tool that easily takes into account factors such as goals, spending glide-paths, tax implications and the age pension allows advisers to better project expected income and wealth in a client's retirement.
A good financial adviser also brings to the table other knowledge like the tax implications of an investment portfolio and how it could diminish a positive return. Rather than leaving the tax bill as an afterthought, a tax-conscious financial adviser would help demystify the intertwined tax implications of each asset class in an investment portfolio and employ tax-efficient strategies during the construction of the entire investment portfolio. This is not an easy manoeuvre even for the most sophisticated of investors.
Beyond the balance sheet
While good financial advice will hopefully boost an investor's portfolio returns, its value should not be solely measured in dollar terms. Instead consider the value of advice more holistically because although elements such as the emotional support that helped weather a period of anxiety is intangible, it is by no means not valuable.
That is advice worth paying for.
Vanguard Australia