How do you quantify the value of advice?

A question a lot of clients ask themselves – is the cost worth it?

I have been working in the financial planning industry for the past 16 years and 10 of those years running a boutique financial advice firm and working with clients from different walks of life. I know the value I add to clients’ outcomes and this is the reason I stick around in an industry plagued by increasing cost, compliance burdens and time pressures and, not to mention, at times very bad press.

But, if you were to ask me to put a precise number on the value I add, it’s not easy to do. How do you put a price on “peace of mind”?

It’s a difficult proposition because there are many components of the advice process and some aren’t easy to attach a figure to. For instance, it’s not always possible to put a fixed value on the return a client will get from behavioural coaching over many years that redefines their understanding of risk and goals.

For example, advising a client to hold their shares when markets fall or advising them to invest more can add significant value, but it takes patience and courage to go against the tide. When markets are in decline, the fear of things getting worse can stop people from investing even though assets are cheap. Likewise, when markets are booming, the “fear of missing out” can cause you to over-extend yourself; as we have seen with the residential property market. If you are looking to take on more debt, you need to ask yourself: can I manage if interest rates went up by 1 or 2%?   

Warren Buffet, the world’s most famous professional investor, said “the stock market is a device for transferring money from the impatient to the patient.” As an adviser, it’s my job to help you remain calm and patient when others are losing their heads!

I also attended the (virtual) funeral service of a client last week, whose son relayed his father’s love of cricket “it’s a game of patience – the same as life – where effort over time equals success.”

This also applies to financial planning – you work out a strategy to achieve a goal, for example a regular savings and investment plan, and then you implement it and repeat it every week, month, and year after year. At first progress is slow, but over time and with the help of compounding returns you achieve your goal – whether it is saving up for a house deposit or your financial independence (the later might take a bit longer).  

So, give me a number, I hear you say. What is the value of advice for the average Australian?

Recently, Russell Investments has quantified what it thinks the value of a financial adviser is today, based on a number of inputs around the services advisers provide, stating “we believe the value an adviser in Australia adds approximately 5.2 per cent per annum to a client’s portfolio”.

So, how did they come up with that figure? The breakdown is based on five components:

  • Appropriate asset allocation (1.1%),
  • Behavioural coaching (2.0%),
  • Cash optimisation (0.6%),
  • Tax-effective investing & planning (1.5%), and
  • Expertise in additional wealth management services (“priceless”).

Source: Russell Investments Value of an Advisor Report, 2021.

The largest input was behavioural coaching, which Russell Investments said “on its own could offset the fee that many clients may pay”. Part of that is helping clients to avoid very common and costly mistakes. “We know that without the disciplined actions of an adviser, loss-averse or overconfident investors can make well intentioned, but poor decisions that can damage their personal Wealth,” the report said.

Russell Investments identified two key mistakes that unadvised investors made last year, which were: selling out too quickly when COVID-19 struck or trying to ride the volatility wave.

According to Russell Investments, “The true value of an adviser lies in the sense of financial well-being they inspire – through guidance, education, timely responses to changing markets and regulation, as well as listening and responding to your evolving needs. They can help simplify your life, reassure you are making the right decisions, and provide peace of mind throughout”.

And a final question – what can a financial adviser do for me?

Source: Russell Investments Value of an Advisor Report, 2021.

Feel free to pass on this article to friends or family who you feel would benefit from financial advice but have been sceptical of the value of advice.

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Sofie Korac is an Authorised Representative (No. 400164) of Prudentia Financial Planning Pty Ltd, AFSL 544118 and a member of the Association of Financial Advisers.

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