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How do advisers define value?

Michael Klimes explores how advisers define and measure value in their businesses

With clients becoming more conscious of what ‘value for money’ entails, how can advisers use research to measure success in this key area?

Discussions about value for money can be like discussions about politics; people can never settle on a shared consensus about what they believe. This does not stop passionate debates from repeatedly occurring. But just because a concept cannot be defined, it does not mean it is useless.

The FCA certainly believes value for money is an important concept but its view of the matter is hard to pin down. In May 2018, the watchdog revealed it accepted proposals to ditch the term “value for money” from the final rules relating to the Asset Management Market Study. Minutes from a board meeting, dated 21 to 22 March 2018, show the FCA decided to drop the term as it said objectives could be achieved without it.

The FCA repeated this line on 10 April when it criticised the general insurance market in a thematic review using the word “value” rather than “value for money” throughout the document.

But the FCA appears to have changed tack in the consultation it has just published on independent governance committees.

Here, it repeatedly uses the term “value for money” again. Furthermore, it proposed an extension to the oversight powers of IGCs to include value for money in non-advised drawdown investments.

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Reading the research
Discussions about what value means for financial advisers and clients can also be fluid and contentious. Research from asset manager Vanguard shows clients are more conscious of value than ever.

Last summer, it published a paper on the evolution of the advice market in the US which it believes is applicable to other countries.

It says: “Investors are more interested than ever in knowing whose interests their adviser is working for, as well as how their adviser is paid for services.

“Investor interest in this important information is unlikely to wane, regardless of the regulatory outcome.

“This ‘great awakening’ of investors may be one of the most important and disruptive factors affecting the value proposition for advisers in the future. In fact, it is not just a US circumstance but a global one.

“In the wake of the global financial crisis, governments (and their regulatory changes) have implemented meaningful reforms that are intended to protect the best interests of investors, an effort that is most likely to continue.”

Expert view

Beware of the rival adviser

Advisers definitely add value when it comes to emotional anxieties. We have done a significant piece of work called Adviser’s Alpha, launched in the UK in 2014. We asked what value does an adviser add to a client’s returns and how can they articulate that?

The figure the research has settled upon is an adviser potentially adds value of about 3 per cent a year to the client’s returns. This broke down into two components: one was best practice of investment allocation, and the other was around that emotional support.

Recently we have seen the investment allocation being challenged by the robo propositions coming on to the market. So the areas advisers add value in remain the same but it is just the delivery of the investment piece that will change.

Our message to advisers is not that they should be worried about technology replacing them, but more concerned with the rival adviser using automation to deliver a service more cost-effectively to the client.

Clients are scrutinising fees more now and we have focused on what behavioural finance brings to the clients over the past year. So advisers need to develop smarter ways of doing investment allocation and separate parts of financial planning that will be delivered algorithmically and the parts that remain more based on human interaction. They have leverage in direct client interactions and should communicate this to them.

Neil Cowell is head of retail sales at Vanguard Asset Management

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A Morningstar survey published in February shows that advisers have their work cut out for them when it comes to helping clients understand the value of professional advice.

It asked nearly 700 individual investors to rank what an adviser can do for them that is most valuable from a scale of one to 15.

It also surveyed advisers about these attributes; 161 responded, ranking the attributes in the order they thought investors found most valuable.

It demonstrated there are disagreements on what is considered value and suggests there are opportunities for advisers to better address investors’ needs and educate them about the real value of advice.

Both advisers and investors placed “help me reach my financial goals” in the top three most valuable attributes, but differed on others.

The smallest gap between investors and advisers in the survey concerned concepts being explained well and advisers presenting themselves in a professional manner.

The largest gap between investors and advisers was about maximising returns and understanding a client’s unique needs.

Interestingly, investors valued the technical side of financial advice more than managing the emotional side which behavioural research suggests often inhibits sound financial decision making.

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Therefore, the paper suggests, behavioural coaching is one solution for behavioural mistakes but this was ignored by respondents in the survey.

Given all of the above, how do advisers approach value in their day jobs?

Measuring value
There are different points of view as to how far value can be measured objectively and if it even matters.

Finalytiq director Abraham Okusanya says: “[Value] is a really important subject but one that is very vague. We cannot expect the regulator to decide or determine what value is from a financial planning point of view.

“The FCA now mentions value and has gone back on the phrase ‘value for money’ as it is somewhat of a tautology.

“The value is in the eye of the beholder and it is individualistic. Clients do not necessarily measure value in monetary terms when it comes to financial advice.

“At times the value is the peace of mind that comes from the interaction with a financial adviser and even sometimes it is the ability to blame someone else.

“There is research that clients take financial advice to delegate responsibility, so the client can say ‘I have done the grown-up thing and seen an adviser but still things have gone wrong’.”

Even though the notion of value changes depending on client circumstances, Okusanya argues there still has to be some basic understanding of what value means to the majority of clients.

He adds: “There has to be a research-based view of what most people perceive to be value from a financial adviser.

“There is no other way to approach it other than trying to understand what the majority of clients perceive value to be, and then try to apply that in the real world.

“There are surveys that try to find out what value is and so delivering it on an individual basis is what has to be done. But it is very difficult to deliver in the real world.

“How do you prove you are delivering value for money to the FCA? I don’t know.”

Adviser view

Heather Dunne
Director, The Pensions Expert

Value reflects the importance of something, which means not only the worth, but extends to the ethics or standards of behaviour. It is the essence of knowing the client, relying on one’s expertise and making the right recommendation to achieve the agreed objectives.

Sometimes, it’s exceedingly difficult to estimate the monetary worth of the advice given. Frequently it’s the support and counselling that advisers provide for their clients during important and life-changing decision processes which they appreciate. It is the indefinable something, that arises out of the relationship, which creates the value of advice.

Rennison Consulting director Roderic Rennison says: “In my mind there are two aspects to value; what contractually you agree with the client and then what the client thinks adds value.

“Most clients perceive value to be about the access they get to the adviser they pay for.

“The value may come from nothing to do with financial planning but keeping a client’s mind at rest with questions they have.

“The FCA says you [as an adviser] need to be specific to demonstrate value and is looking for proof about what is delivered against what is promised. I don’t think that is unreasonable.”

Inspiring Advisers founder Paul Armson believes value is ultimately in the eyes of the client and has a very personal reason for this view.

He says: “I am 60 now. For the first 10 years as an adviser I just arranged pensions, mortgages and a variety of products for people. When I was 29, my mother died suddenly, and I witnessed my father at 59 experience a massive amount of grief.

“He worked all the hours God sent him and said ‘I am doing this for us’ and then she was gone.

“After this I saw my first client and when I asked them about their life and future, they said ‘one day I would like to do this’, and I challenged them and said ‘why not do this now?’ I challenged them and made them realise they should do what they want now and not wait.”

He adds: “The planning I give is about helping clients to get a lifestyle. How is what I do going to make their life better?

“I stand for proper financial planning. The motive of the industry is to sell products and acquire assets.

“Advisers are on the side of the distribution of financial products. They are going to have to wake up and deliver better value as there will always be others who deliver a financial product at a lower cost than you.”

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There is one comment at the moment, we would love to hear your opinion too.

  1. Emotion, ethics, shmethics. Do you make money for your clients and is this significantly more than the fees you charge? Conversely when things go bad do you ensure that the lose as little as possible? Are your fees significantly lower that your competitors? Are you available 24/7 X 360? can you come back – always – with answers that solve the problem? That is value.

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