What do financial advisers really do?

In today’s era of professional financial advice, the debate about what financial advisers really do for clients seems to surface more and more.

Whilst technical information about financial and investment planning is increasingly available for free on the internet, global barometers show that the demand for financial advice keeps increasing.

A false perception

This would seem to indicate that financial planning involves a lot more than the simple maths of compound interest and understanding the relationship between investment risk and return.

Yet many financial and investment advisers continue to put forward a value proposition to clients based on delivering superior investment returns through some proprietary investment management process.

Surely a financial adviser’s role extends way beyond the delivery of superior investment returns?

A well-researched area

A fair amount of global research into the theme about managing client behaviour as part of an adviser’s role attempts to answer the following broad question: “Are there major differences in the financial position of investors who consulted advisers early on in their lives and investors who do not?”

Readers are invited to study these reports directly. Skimming through the conclusions of these four reports, however, a very interesting pattern emerges:

• The Investment Funds Institute of Canada Value of Advice report (2012) concludes that households who consult with advisers continuously for seven to fourteen years end up with almost double the household assets than households without an adviser. The difference is ascribed almost entirely to the fact that advised households have a much higher savings discipline.
• The US National Bureau of Economic Research into the Market for Financial Advice (2012) highlighted the dangers of advisers who merely chase portfolio returns, or who are encouraged to “trade portfolios” aggressively. Such advisers are claimed to reinforce the negative behavioural biases of their clients, destroying value.
• Alpha, Beta and Now…. Gamma by Morningstar (2013) investigated how improved income drawdown strategies could benefit pensioners. They estimated an increased portfolio return of around 1.8% per annum through improving the financial decision making of retirees.
• In Putting a value on your value: Quantifying Vanguard Advisors’ Alpha (2014), Vanguard analysed the impact of various financial adviser activities on client portfolio performances and estimated a potential positive portfolio performance impact in the order of 3% per annum after fees from the following sources:

- Appropriate portfolio construction (0.75% per annum);
- On-going rebalancing of portfolio and managing income drawdowns (0.75% per annum); and
- Behavioural coaching (1.5% per annum).

Looking at these four research reports, one cannot help but notice how every report highlights the critical importance of a financial adviser controlling a client’s financial behaviour, decisions and discipline.

Underestimating one’s role

Many financial advisers underestimate their role as financial therapists. Yet when asked to explain how a relationship with a new client develops, most advisers intuitively point out the following steps:

• Develop a rapport with a client. Listen to their financial problems, needs and wants, and start educating the client on the trade-offs inherent in what they want, what they really need, and what is possible within the framework of the risk/return payoff available in the market;
• Prepare a financial plan for a client taking all the above points into consideration;
• Present the financial plan to the client, and convince the client to take some sort of action; and
• After implementation, review the plan at least annually, and make adjustments as necessary.

Noticeably, three of the four steps are predominantly about counselling a client on the client’s finances and getting the client to commit to changing his or her financial behaviour. It is clear that a significant part of an adviser’s value-add is through encouraging clients to improve their financial behaviour.

As an adviser, recognise your important role as “financial therapist/coach” and be more explicit about his role when dealing with clients. It should result in better long term client relationships.