Advisers are the solution to the question of why retail investors leave so much of the possible return available in markets on the table, according to Vanguard head of investment strategy group Asia Pacific, Jeff Johnson.
Addressing an audience of financial planning and accounting professionals at the SMSF Association National Adviser Conference, Johnson said that over the last 30 years, the Australian share market has experience 11 bear markets.
"They usually occur on average every three years. The last one in Australia was relatively mild in 2011. The most recent correction is again, relatively mild in historical terms, especially next to the global financial crisis. Bear markets account for about a third of the time that markets have been open over the last 30 years," he said.
In the context of increased volatility, Johnson said, advisers have a greater opportunity to prove their value and can make a significant improvement to the returns their clients' make, just by preventing them from succumbing to their behavioural biases and making bad decisions.
"Investors are nervous. Investors can take some of the more sensational words in the media out of context, leading them to make damaging short-term decisions with their portfolios," he said.
"Investors in the average growth portfolio can expect 5-7% returns. The bad news is that most investors won't earn that 5-7% because bad practices and biases get in the way."
Johnson explained that investors, left to their own devices, tend to fail to rebalance and make bad decisions.
"If 7% returns are on the table, our research suggests investors will only achieve 4%. Part of the adviser's job is to get that person closer to 7% by coaching them to create that 'adviser alpha'."
In quantifying adviser's alpha Vanguard's research shows that about 150 basis points come from behavioural coaching. Keeping costs down can achieve about 75 basis points.
Another piece of Vanguard research highlighted by Johnson indicates most investors and advisers are happy with their relationship and the degree of communication that goes one. But when asked what the adviser can do to improve the relationship lower fees was, unsurprisingly, top of the list but the other priorities are to do with communication - regular updates, greater frequency of contact and simpler explanations.
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