What is the real value of advice? Vanguard believes it knows the answer based on a year’s worth of empirical research, mostly in the US. If this is a subject that interests you then download a copy from its website. The document is called, Adviser’s Alpha: Putting a Value on Your Value.
Whether you agree with it or not, it is an important piece of work and should form the basis for some key conversations with clients.
Unsurprisingly, now clients see what they are paying for advice they are curious to know whether it represents good value for money. If it does not, the chances are many will decide to go elsewhere, perhaps to one of the mushrooming DIY solutions.
My guess is that we have been in something of a honeymoon period with many clients. The crunch may come after another year or so of adviser charging, especially if markets remain flat or fall and the annual charge eats into portfolio income and capital values.
Clients will be tempted to use advisers when they think they need them; advisers will be trying to persuade clients this need is ongoing.
The Vanguard document makes a strong case for ongoing advice. It defines adviser’s alpha as the difference between the return investors might achieve with an adviser and the return they might have achieved on their own.
Here is the useful list of added value services:
- Suitable asset allocation using broadly diversified funds or ETFs
- Cost-effective implementation
- Behavioural coaching
- Tax allowances and asset allocation in wrappers
- Spending strategy (withdrawal order)
- Total return versus income investing
Vanguard describes and analyses each of these services in a way that even the most expert adviser should find refreshingly clear and useful – even those who do not agree with the house bias against complicated products and active management.
Setting out the added-value proposition to clients as a clear set of actions is a powerful way to help advisers communicate their value. In fact, just describing the different processes provides clients with a greater understanding of what they would miss with no adviser. A similar logic applies to the use of the “six steps of financial planning”. Most of us seem to assume clients know what advisers do for them, even though we know very well their understanding is mostly very scant.
The more controversial aspect of Vanguard’s work is to estimate a financial value in percentage terms on advisers’ practices with respect to their clients’ investments. Guru to the financial planning profession Clive Waller has been scathing about the attempt and several advisers I have discussed it with are also sceptical.
My view is more favourable. Such an exercise cannot be precise, although the use of numbers like 43bps may sound as if the returns have been exactly calibrated. I think advisers should view the numbers as very broad indicators of the possible scale and relative importance of the value of these practices.
An important proviso is the benefits of some of these practices do not arise smoothly, so behavioural coaching would mostly add value in times of market stress or euphoria. There are also important parts of the process like asset allocation and investing for total returns that have considerable value but Vanguard says are too difficult to quantify.
Based on past returns, Vanguard has calculated that a 70:30 per cent equity/bond portfolio that has been regularly rebalanced generated annual returns up to 43bps higher than a commonly chosen 60:40 equity/bond portfolio allowed to drift out of the set allocation. Okay, it is rather arbitrary and based on past performance, so it is not a carved-in-stone eternal verity, but it does give advisers and clients a rough idea of the benefits of rebalancing.
Even more controversially, they place between 66bps and 94bps on the value of investing in cheap funds rather than buying expensive ones. As they say: “the precise savings will depend on the asset mix”. However, if you go along with the thesis that low cost is better than reassuringly expensive, it has some merit as a range of possible savings.
Similar quantification estimates are made for the value of behavioural coaching (a perhaps rather arguable 150bps). It estimates that deploying equities in taxable funds and placing bonds in ISAs and suchlike wrappers could be worth up to 23bps to a higher rate taxpayer. Financing spending in retirement from taxable funds in priority to tax-free funds could boost returns from a £250,000 portfolio by up to 29bps a year, according to Vanguard.
The point is to do the sums for a moderately realistic example rather than make precise predictions about any particular client. And the final number for the value of advice? Roughly 3 per a year in Vanguard’s view.
Danby Bloch is editorial director of Taxbriefs Financial Publishing
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