By Rory Brachner
Financial advisers cannot predict how markets and their clients’ investments will perform and should not be expected to, but they can boost your financial position in less obvious ways. Several studies have quantified how much added value a professional adviser brings to a client’s finances over the long term, and it can be considerable.
Asset Managers use Alpha as a way to measure excess return, while Beta is a metric for volatility, or risk, of an asset, but in a 2013 study by Morningstar analysts David Blanchett and Paul Kaplan also showed the value of measuring Gamma an indicator of the value added by a financial adviser to a client’s investment portfolio. This was on top of value added by market performance (Alpha) and the amount of risk in the portfolio (Beta). They looked at an income-providing retirement portfolio, and found that an adviser could boost a retiree’s income by more than 22%.
Other research has come from US investment house Vanguard, which developed a value enhancing framework for advisers called “Adviser’s Alpha”. It showed that, by following the practices outlined in the framework, advisers can boost clients’ investment returns by 3% a year. These practices included optimising your investment portfolio for risk and diversification, monitoring and rebalancing it where necessary, optimising tax-efficiency and keeping your investment costs low.
Changing behaviour has the biggest impact.
However, the biggest factor in adding Gamma, revealed in the Vanguard research, had nothing to do with investment performance; it was the advisers’ influence on their clients’ behaviour. Behaviour alone accounted for two-thirds of the annual 3% value-add for clients.
In 2018, JP Morgan Asset Management, found that, over 20 years, from 1998 to 2017, the average US investor’s real (after-inflation) average annual return was just 0.5%. In contrast, the US stock market returned 5.1%, a balanced portfolio 4.3% and bonds 2.9%. The biggest factor in the investors’ poor performance was trying to time the markets, constantly switching in and out of investments.
One of the best things an adviser can do for you is prevent you from making poor financial decisions. By staying the course in an appropriately balanced, well monitored portfolio, and not giving in to the emotions of greed and fear, which you might do without a professional, fee-based financial advisor to guide you, an extra 3% a year on your long-term savings is achievable.
The right advice adds up
Lets take two investors who put away R5 000 a month, increasing their contributions by inflation (5%) each year.
Investor A has a poorly diversified portfolio and tends to switch into safer investments when markets fall. As a result, his investments achieve a 7% annual return. After 30 years his investment is worth R11 million.
Investor B has a well-diversified portfolio, optimised for costs and tax and carefully monitored by his fee-based financial advisor, who prevents him from de-risking his investments during troubled times. As a result his investments achieve a 10% annual return. After 30 years his investment is worth R18 million, about 64% more than Investor A.
Value beyond investment returns
There are other ways advisers add value that have nothing to do with your investments, so it is not just all about growing nest eggs for their clients’ golden years – a diligent fee-based financial adviser will also help you to optimise your insurance policies, structure your estate, control your spending, and minimise your debt, among other things. Holistic financial planning is always keeps the bigger picture in mind.
Ultimately, the peace of mind that comes with having well-rounded financial security is priceless.
* Brachner is the Managing Director at DoshGuide, a subscription based advice service for next-generational clients
PERSONAL FINANCE