Pieter Hugo, MD of Prudential Unit Trusts
With the investment environment especially challenging during the Coronavirus market downturn and the caution of many investors in its aftermath, the value of advice from financial advisers has been more crucial than ever.
In fact, it is in times like these when they most prove their value. There is hard evidence that professional investment advice is worth its costs in several different ways, especially when market conditions are extreme. Not only can it prevent investors from acting out of emotion, but it can help them stick to their longer-term plans, to help preserve the value of their existing assets. And on top of this, that counsel can add extra value to portfolios by finding new opportunities that might otherwise be overlooked.
Research has shown that poor investor behaviour has a significant detrimental impact on investment returns. This is largely down to poor timing, where you either buy or sell at the wrong time. These decisions are typically driven by a heightened sense of emotion (such as panic or greed), instead of being based on objective data or long-term investment objectives.
When looking at this phenomenon within the context of today’s investment environment, it’s clear that the fear of losing money has been one of the primary drivers behind the recent exceptional popularity of cash and foreign investments. With so much savings flooding into low-risk and offshore solutions, it’s likely that many investors sold assets at depressed values during the aftermath of the Coronavirus market crash and subsequently missed out on the sharp recovery in the local equity market in the second half of 2020 and into 2021.
Here we take a closer look at a study conducted by Vanguard Group, one of the world’s largest investors, that quantified the value of using a good financial adviser.
A financial adviser could add a potential total of “about 3%” p.a.
While recognising that many aspects of advice are qualitative and therefore difficult to quantify, Vanguard’s research** concluded that a financial adviser could add a potential total of “about 3%” p.a. in terms of net returns to a portfolio relative to the average client experience.
What is interesting is that half of this, or 1.5% p.a., was derived solely from behavioural coaching or through helping their clients stick to their personal financial plan. The next largest factor was asset allocation decisions between taxable and tax-advantaged investments, at between 0-0.75% p.a. Importantly, the study found that value from behavioural coaching wasn’t added uniformly over time, but typically in large “chunks” every few years, as markets moved between cycles.
Financial advisers helped manage their clients’ expectations by reminding them about the “normal” cyclical or volatile nature of markets and gave them appropriate long-term time horizons upon which to evaluate their investment returns, measuring against a tailored long-term financial plan. They helped investors overcome their innate biases towards, for example, selling investments in a market downturn out of fear (which would simply lock in losses), or jumping into the latest popular but little-understood investment, like Bitcoin.
According to the research, behavioural guidance provided by a financial adviser is more important (and valuable) than their “normal” role of suggesting the appropriate investments. Their main value lies in the ways their expertise can help clients avoid making mistakes.
In short, using a financial adviser is not just about deciding how and where to allocate your investment. Instead, it’s about establishing a partnership with someone you trust to give you the right advice, even when it’s not necessarily the advice that you want to hear.
It can be difficult to remove emotions from your investment decisions, but as the Vanguard study shows, it is precisely in the most emotional times that having the right adviser by your side can make all the difference.
- *Francis M. Kinniry Jr, Colleen M. Jaconetti, Michael A. DiJoseph and Yan Zilbering, August 2019, “Putting a value on your value: Quantifying Vanguard Advisor’s Alpha”, Vanguard Group, Valley Forge, PA.