When it comes to financial advice, one of the most common questions we get asked by prospective clients is “how much will it cost”. It’s a very valid question. After all, as an impartial and fee based financial advice business that doesn’t accept commissions, it’s our clients and no one else paying for the services we provide. But what can often get lost in the discussion around fees is the value of financial advice, and perhaps a better question is “what value will I get from using a financial adviser.”
Leading global investment solutions provider, Russell Investments, published a report in 20191 where they looked to quantify the value of financial advice and the results are very interesting. The report concluded the value of a New Zealand financial adviser could exceed 5% per annum. So how did Russell Investments arrive at this number?
Firstly, they measured the impact of regularly rebalancing portfolios rather than leaving the composition of portfolios to go unchecked. Russell Investments estimates that since 2004, the disciplined rebalancing of a balanced portfolio comprising 40% defensive assets and 60% growth assets would have added approximately 0.4% per annum in investment returns.
Secondly, they looked at the behavioural mistakes investors often make, being the things they actually do rather than the things they should do. One of the most common mistakes is to chase past performance on the presumption the good returns will continue. Based on a 34 year period dating back to 1984 and using US share market data, Russell Investments estimates chasing returns cost the average investor 1.9% per annum.
The third area Russell Investments identified is the cost of getting it wrong. A common mistake is having the wrong investment strategy for an investor’s objectives and time horizon. Russell Investments provides an example using their conservative and growth portfolio options from Aon’s KiwiSaver fund. Over the 10 years to October 2019, the growth portfolio out-performed the conservative portfolio by 2.9% per annum.
People don’t always choose the right investment strategy for their circumstances and some people are reluctant to engage with a financial adviser or their investment provider to select an investment option suitable for their circumstances. A discussion paper by the Ministry of Business, Innovation and Employment from August 2019 identified 430,000 people invested in KiwiSaver are in their scheme’s default (conservative) investment option, meaning they haven’t elected to choose from the investment options available to them from their KiwiSaver scheme provider. Without financial advice we suspect a good proportion of these people will be in the wrong investment option for their circumstances, and this could be costing them through lost returns.
Furthermore, $183bn2 of household assets are invested in deposits with registered banks. It’s more than likely a reasonable chunk of this money is not required for short term needs and could be invested in a diversified investment strategy. Over the longer term this is likely to provide a substantially better return compared with deposits, particularly in the current low interest rate environment. Saturn’s own experience demonstrates this point. For the 5 years ending September 2019, the performance of Saturn’s model investment strategies ranged from 6.2% per annum for a conservative portfolio to 12.4% per annum for a very aggressive and growth oriented portfolio. Over this same period, the average return from investing in 6 month term deposits with the major banks would have been just 3.4% per annum.
The fourth area of value Russell Investments identified although didn’t put a specific number on is financial planning, which is arguably the most important aspect of the service a financial adviser provides for clients. Financial planning ranges from helping clients identify their life and financial goals through to making investment recommendations and managing and monitoring the progress of investment portfolios on an ongoing basis. A financial adviser can simplify the complex world of investing for clients and remove the administration burden of managing a portfolio of investments.
So yes, fees are an important consideration but the value of financial advice could significantly outweigh the cost.
The information provided is of a general nature and is not intended to be personalised financial advice. You may seek appropriate personalised financial advice from a qualified Authorised Financial Adviser to suit your individual circumstances.
Returns for Saturn Advice model investment strategies are before the deduction of tax and after the deduction of investment manager fees. Actual returns experienced by investors will vary depending on a number of factors including variations to asset allocation, exchange rates and transaction costs. Past returns do not tell you how investment strategies will perform in the future.
 2019 Value of an Adviser Report
 Household balance sheet data. September 2019. RBNZ