The market volatility and uncertain economic outlook experienced in the spring of 2020 serves as a reminder of the value of working with a financial advisor, according to a new report.
Russell Investments’ third annual Value of an Advisor report estimates that advisors deliver value of 5.2% or more each year to their clients in a relationship that extends well beyond investment-only advice.
The 2020 report outlines five key elements that make up the value of advice:
- preventing behavioral mistakes;
- advising on appropriate asset allocation;
- making investors aware of the cost of holding cash;
- providing advice on tax-effective strategies; and
- expert knowledge in additional wealth management services.
“We know some clients can experience sticker shock when they see advice fees for the first time,” says Bronwyn Yates, Russell Investments Director’s Head of Business Solutions. “Our report shows that an adviser charging an advice fee of $3,250 to a client with a $250,000 balance can potentially deliver $13,250 of value—that’s $10,000 extra value to the client.”
To help advisors move beyond a fee conversation and amplify their value, the firm developed a formula to help advisors understand and communicate the full value of their services: A+B+C+E+T = value of an advisor. The formula is:
- A is for Appropriate asset allocation. Helping clients to work through their values, preferences and motivations from the outset.
- B is for Behavioral mistakes. Helping clients avoid common behavioral tendencies to help achieve better portfolio returns than those investors making decisions without professional guidance.
- C is for Cost of cash. Because holding too much cash can come at a cost, advisors can assist clients in investing in a well-diversified portfolio that seeks to balance the needs of liquidity and targeting growth within the risk levels appropriate to the client.
- E is for Expertise. A common misconception is that financial advisors are purely investment managers, whose only job is to select investments and achieve a certain level of return, but quality financial advice goes way beyond this.
- T is for Tax-effective investing. Advisers play an important role in a client’s tax journey, helping them navigate key components when it comes to tax-efficient strategies.
Beyond Investment Management
Of the elements quantified by Russell Investments, an advisor’s ability to help investors avoid behavioral mistakes—such as chasing short-term market volatility or past performance—was the largest contributor, adding at least 2.2% per year of additional value for their clients’ portfolios.
The firm also observes that during the early stages of the pandemic, many investors were fearful of loss as markets fell that they switched predominantly to defensive assets or entirely to cash, just prior to the market hitting its March 17 low. The report estimates that for someone with an investment balance of $250,000, selling to cash on March 16 would have locked in losses of more than $50,000. However, an investor with the same balance who stayed the course during the volatility would have recovered nearly $20,000 by the end of May.
Tax-effective Recommendations
Tax-effective investing was the next biggest contributor, according to the report, representing 1.5% of added value. While tax is often considered the realm of the accounting profession, an advisor can also provide expertise on managing and optimizing investment tax for their clients.
This not only requires a close understanding of the client needs, but also knowledge of new innovative investment solutions that can help manage personal tax circumstances—such as managed account solutions, the report notes.
“While dedicated advisers are confronting challenges as volatility whipsaws many investors’ savings, they also need to articulate that the value they deliver goes far beyond selecting and managing investments,” says Russell Investments Head of Wholesale Partnerships Neil Rogan. “By demonstrating to clients how the value they deliver exceeds the fees charged, advisers can improve client engagement and satisfaction at a time of extreme market uncertainty.”
