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Financial Planning
Through good and bad: Advisers add value

Despite COVID-19 volatility, financial advisers have managed to deliver value of 5.2% or more each year to clients, according to new research.

It's the key finding of Russell Investments' Value of an Adviser Report for 2020, saying this is the case for adviser/client relationships that extend beyond investment-only advice.

The biggest contributor to the 5.2% per annum or more achieved, Russell said, is an adviser's ability to help investors avoid behavioural mistakes, such as crystalising losses. This adds at least 2.2% per annum of additional value, the report suggests.

As markets fell due to COVID-19 and investors panicked, Russell estimates someone with an investment balance of $250,000, selling to cash on March 16 would have locked in losses of more than $50,000 versus a member with the same balance who stayed invested during the volatility, recovering almost $20,000 already by the end of May.

"Our report shows advisers can play a critical role in helping investors avoid common behavioural tendencies and may potentially help their clients achieve better portfolio returns than those investors making decisions without professional guidance," Russell Investments director, head of business solutions Bronwyn Yates said.

The next most significant contributor, representing 1.5% of added value is tax-effective investing.

"Advisers can add significant value to a client through structural tax strategies to manage investment tax," Russell said.

"This not only requires a close understanding of the client needs, but also knowledge of new innovative investment solutions that can help manage personal tax circumstances - such as managed account solutions."

Other factors that contribute to the 10-year added value include appropriate asset allocation (0.90%), cost of cash (0.60%) and expertise.

On asset allocation, Russell said it surveyed over 3000 non-advised super members and found 67% didn't know how their funds were invested or relied on the default option, investing with an asset allocation of little to no relevance to their personal circumstances.

"Advisers provide important access to funds and strategies a client may not be aware of or able to access themselves. This includes the right active strategies to build growth, ensuring the total fees are appropriate and the portfolio is well diversified to manage risk," the report reads.

On cash, Russell said it provides a sense of security to investors who, when increasing allocation, often don't realise they are putting the rest of their portfolio in jeopardy via cash drag.

"More than just return seeking, advisers are experienced at working with a client to closely identify their needs, with the ability to manage planned, unplanned or unforeseen expenditures," the report reads.

"Advisers can help keep the portfolio invested where appropriate to grow assets for future spending needs and finding the best source and process for accessing capital on behalf of their clients when required."

Finally, the report says expertise is priceless, providing perspective and creating efficiencies - particularly in times of significant change.

"Expert knowledge is invaluable through periods of change. Whether personal circumstances change, as a result of redundancy, personal trauma, inheritance or business transactions, advisers will work with clients to identify the best path forward," the report states.

"If there are external changes, like legislative changes, tax treatment of super or other assets, an adviser will be able to assess the details of the change and evaluate the impacts to the client's individual circumstances."

With the issue of advice affordability front and center currently, the findings should aid advisers in demonstrating to clients that the value they add outweighs the fees paid.

"We know some clients can experience sticker shock when they see advice fees for the first time. Our report shows that an adviser charging an advice fee of $3250 to a client with a $250,000 balance can potentially deliver $13,250 of value - that's $10,000 extra value to the client," Yates said.

"Our report aims to help advisers move beyond a fee conversation and amplify their value creation capabilities."

Read more: Russell InvestmentsBronwyn Yates
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