The Value Of Financial Advice

Issue 69

One of the problems financial advisers face is being able to prove to a new or potential client that they are worth their fees. Existing clients are usually comfortable with this because they know and "feel" the value provided.

I say “feel” because an element of what we provide is intangible. It is the comfort that the client feels by having someone they can bounce ideas off, that keeps them on track with their planning and makes them feel safe, or at least safer. However, whilst the warm fuzzy feelings are important, it is also possible for the adviser to make it more tangible and put figures on the value. Sometime ago The Telegraph published an article about this very subject, concluding that individuals who took advice were significantly better off. Investment giant, Vanguard, together with Standard Life and Royal London have individually produced their own studies. So have the academics, including the University of Montreal. All concluded that advisers add value, and it can be considerable. Standard life estimated it was an average value of £40,000. The areas where advisers score are numerous and include tax planning, investment asset allocation, behavioural coaching, withdrawal strategies, investment selection and rebalancing. Adding up the small percentage gains and based upon the lowest figures produced in any of the studies in each area, gives an enhanced annual return of around 2.5% per annum, after allowing for adviser charges. As this benefit compounds year upon year, in the longer term the differences can be eyewatering. By way of example, I was advising a lady with a relatively small fund but with a 25-year time horizon. We considered the appropriate asset allocation and what we could reasonably expect the markets to give us as a return. We also reduced some of the added value assumptions. Over 25 years, the anticipated market return was 281.34% compared with 558.4% with the added value we could give. In money terms, her £75,000 would be £286,000, with standard market returns, compared with £493,000 with advice. Clearly, these figures are a powerful illustration of the value of advice, but just an illustration, nonetheless. Inflation would also reduce the buying power of these sums. One of the biggest added value factors is behavioural coaching and the reader may be wondering what I am on about. I sometimes refer to it as the “Don’t panic, Captain Mainwaring” factor. It is about avoiding knee-jerk decisions. For example, clearly in March 2020 markets became more volatile as lockdown was imposed and the extent of the pandemic was realised. Naturally, a few of our clients were concerned and needed to know the best course of action. It was in fact the ideal opportunity to fall back upon cash reserves and to stop drawing from investments for a few months. By the end of the year, portfolios had recovered and indeed 2020 was an excellent year for our portfolios despite the falls of late February and early March. Significantly, by not panic selling we avoided the decision of when to get back into the market. That is called timing and is impossible to achieve consistently. Time in the market works better than timing the markets. There is research by the ton to back this up, yet human instinct pushes us to make emotional and wealth damaging decisions. Behavioural coaching seeks to avoid taking these destructive actions. If you would like more information, or would like to discuss your own position, then please do not hesitate to contact me or my colleagues, David Hughes and Denise Graham. Peter Rutherford is a director at Rutherford Hughes Ltd. He can be contacted on 0191 229 9600

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