The value of a financial adviser

12 November 2019 | Investment principles


As we count down to the end of 2019, most of us are probably taking stock of the year that was and reviewing how our investments have performed this year. This is also a particularly opportune time to determine if we need to adjust current plans or to rebalance portfolios. As the year winds down, it is also a good time to plan for the next year and determine if you need to do anything differently to achieve your financial goals.

And what a year it has been! With the uncertainty of the US/China trade war, the ongoing Brexit debacle, the Reserve Bank of Australia's (RBA) decision to cut rates to a record low of 0.75 per cent and flagging consumer confidence levels, amid many other events, it is certainly a surprise to note that the Australian Stock Exchange is up 20 per cent (at time of writing), since the first opening bell of 2019 rang.

It is particularly during these periods of market volatility and ongoing uncertainty where investors see the value of an adviser's alpha.

A term coined by Vanguard's US business in the early 2000s, the adviser's alpha is a wealth management framework that refers to the real value of financial advice and how it is understood to be more than a number on an investment statement that is higher than market benchmarks.

The framework highlights that the value of good financial advice is much broader than investment selection, and presents tangible strategies to help advisers strengthen their client relationships and define a unique value proposition.

It discourages advisers from basing their value proposition around market timing and their ability to pick the best performing securities and encourages the adviser to act as a wealth manager, financial planner and behavioral coach – providing discipline and reason to clients who might sometimes be undisciplined and emotional.

In times of market shocks an adviser's experience and stewardship can be particularly valuable to clients because left alone investors can make choices that impair their returns and put at risk their ability to achieve their long-term objectives.

So here are four reasons you should engage a financial adviser:

1. You are a normal human being, with emotions

Humans are governed by emotions and so it is not surprising that the process of investing can often evoke strong emotions. Abandoning a planned investment strategy can be costly. Equally, holding on to an asset (such as a first home) that was purchased during a particularly poignant time in your life, even though it makes more sense to sell it, could have a financial cost. A good adviser will be a behavioral coach of sorts, act as an emotional circuit breaker and help you stick to a disciplined approach to investing.

2. You keep a watchful eye on market commentary and think about how it impacts your individual investment or asset class on a daily basis

The convincing nature of daily market commentary can tempt even the most seasoned of investors into diverting off course but the truth is – and the data often reflects it – performance-chasing behavior is often detrimental to overall returns. Time and again, it has been proven that the majority of the market consistently gets out and back into the market following periods of volatility too late to capture any meaningful benefit.

The reality is, investment success is more often driven by time in the market and not timing markets. A good adviser will help you tune out the market noise and support you in maintaining long-term perspective.

3. You don't have specific investment goals

For many of us, our biggest long-term financial goal is to save enough money to retire. But that is a broad goal and needs to be defined properly before we can set our investments to work to achieve that goal. A good financial adviser will assess your circumstances and constraints and work with you to define your unique short, medium and long term financial goals.

A responsible financial adviser will also set out the risks that your investments are subject to, and create a plan to mitigate them, whilst still achieving your goals.

The value of a good financial adviser often shines through during the process of portfolio construction – an important process that is often overlooked by investors on their own. The provision of a well-considered investment strategy and asset allocation that is balanced, diversified and meets a client's goals, is an important way in which advisers add value. Further, the knowledge that the specific asset allocation was a result of careful consideration and not happenstance often serves as an emotional anchor during the spikes of panic in the markets.

A good financial adviser worth their salt will also help you continually redefine your goals and rebalance your investment portfolio as your circumstances change.

4. You may not be sure of all your tax implications

The tax implications of the entirety of our investment portfolios are often an afterthought even for the most sophisticated of investors. Taxes, like costs, inevitably diminish a positive return. A tax-conscious financial adviser will understand the inter-play of the tax implications of each asset class, and employ tax-efficient strategies in the construction of an entire investment portfolio.

For some investors, value of an advisor could be difficult to quantify. For others, the lack of confidence to handle their financial matters, time or willingness could mean that working with an adviser buys peace of mind.

But ultimately, it is up to the adviser to convince you that their value is real, and that their value represents more than a number on a client statement.

This article was first published on the Firstlinks website on 6 November 2019.


Daniel Reyes

Daniel Reyes
Principal, Investment Management Group