Can you put a value on advice?

Arnaud Malherbe, Wealth Manager at FNB Financial Advisory.

For a man who eschews financial guidance, Berkshire Hathaway founder Warren Buffett is no stranger to the value of good advice. He’s also not above handing out his own pearls of wisdom, as anyone lucky enough to attend his annual shareholders meeting in Omaha, Nebraska can attest. People listen to Buffett because of his successful track record in the market; without that he would be just another investor with a Coca-Cola habit.

Time in the market and a track-record to draw on, is comforting for investors and yet, says Arnaud Malherbe, Wealth Manager at FNB Financial Advisory; it is still hard for clients to put a value on good advice. As Buffett himself says: “Price is what you pay. Value is what you get.” So what value do you get?

With the world economy in turmoil, risk-averse behaviour being the order of the day and returns hard to come by, it is easy to understand why clients are jittery and concerned about their investments. But, in order to be successful in the world of investing, one needs a steady approach, hinged in long-term thinking and, of course, sage financial guidance.

Malherbe says, “At the moment, I think that few people are really looking at the value of advice. This value is extremely hard to articulate, but it is something that will be a real focus with the new Retail Distribution Review (RDR). Interrogating the numbers may hold the answer.”

Take, for example, the following two graphs:

“The graphs clearly highlight the value of advice in the long term and the importance of sticking to a plan of action, even when things get tough. Actually, especially when things get tough, because a good adviser will assist a client in sticking to their long-term agreed goals, rather than being swayed by emotion, which so often affects all of us,” says Malherbe.

Interrogating the same S&P 500 data, London’s Financial Times newspaper noted that, in 2015, “the S&P 500 rose 13.6% and the average investor in equity mutual funds made 5.5%”.

Malherbe explains that, “The overwhelming reason for this discrepancy was bad timing by investors. If investors had stuck to the plan they had taken time and effort to craft with their advisor – including creating a portfolio suited to their risk profile – then they would likely have stuck it out and found themselves better off on the other end.”

He also cites an example of a client who has two portfolios, one is managed by the client himself and the other is managed by FNB.

“Last year the portfolio we managed recorded 18% growth over the year, to the middle of last year, and his personally managed portfolio was 22% down. So a 40% swing. There is a very good reason for that, because the portfolio he manages himself is heavy on a single share, therefore lacking in the diversification we would put in place. However, when that share swung up again in 2016, his portfolio swung back up quite considerably, while our portfolio was fairly flat.”

Such are the vagaries of investing on a day-to-day basis, but how does this pan out in the long term? Malherbe says getting caught up in short-term swings distracts you from assessing the long-term picture over, say, five years or more.

“This is not what financial planning is all about, especially in volatile markets which swing up and down within 24 hours. How risk management plays out, especially in turbulent markets like today’s, comes down to prudent financial management. The advice we offer, the diversification we can bring to a portfolio and the risk management we put in place, does show a very real level of value creation and wealth preservation - something which benefits clients in the long run,” he says.

He adds that choosing to invest in the top 10 shares on the S&P 500 may be easy to do, but it is not financial planning, it is stock picking. Explaining that sometimes these portfolios win, sometimes they lose, but what happens in the long term and more importantly, does this conform to the client’s personal goals?

“The litmus test for investing lies in achieving returns in line with your time horizon and end goal. Industry data tells us that, on average, non-intermediated clients do 4% worse per annum than clients who have advisors, even after the advisor’s fees have been taken off.”

His assertion is supported by international findings from KPMG Econtech in Australia which found that “the provision of financial advice leads to improved savings behaviour”. The KPMG research, conducted over the 2005-06 and turbulent 2008-09 financial years, found that “an individual who has a financial advisor is estimated to have saved an additional $6 900 over the period from 2005-06 to 2008-09, when compared to similar individuals without a financial advisor. This is equivalent to an additional $1 725 in savings each year for those with a financial advisor compared to those without.”

Malherbe concludes: “The classic example is that a money market account might charge you 50 basis points (in advisor fees), an equity fund might charge you 150 basis points, but if the equity fund gives you a return of 15% and the money market gives you 7%, which one do you want?”

Surprisingly perhaps, the answer is neither, or both, as it all depends on your individual circumstances and this is what a good adviser will help with. The lesson is that fees should never be seen in isolation, but rather in the light of what value you get for the fee and, more often than not, the benefits of a good financial plan far outweigh the fees levied.