The REAL value of a financial advisor

-By Elke Zeki

 

Many people believe that financial advisors add significant value by fund & product choice, asset allocation and budgeting. What concerns us is that research shows (and has for a long time) that there are algorithms that can do this much better than any human being can. Yet advisors are slow to embrace this technology. They see it as a threat and instead of adjusting their value propositions – they put their heads in the sand.

We argue that financial advisors can use this technology to their advantage.

REAL advisors offer skills and add value that’s difficult to quantify and calculate, and typically cannot be done by algorithms. We call it the REAL value added. This is what we believe you should actually pay for

What skills are we talking about? Let’s unpack them over these five points:

 

This is not an easy thing to do.

  1. From confusion to clarity

A REAL advisor should help you figure out what your goals are; and then what the solutions are to helping you achieve those goals.

People generally see an advisor to address specific issues or seek investment advice. This is often driven by questions raised through media or discussions with friends around the braai. This can be confusing and cause anxiety with regards to finances and investments.

It’s rare that advisors dig deeper to understand the bigger picture and help identify your most important values and life goals. A doctor always diagnoses before writing a prescription.

Understanding and defining these goals is like understanding a doctor’s diagnosis and treatment plan. You may ask for a prescription for headache medication but the doctor has to dig deeper. The sometimes-illegible prescription for meds you’ve never even heard of doesn’t matter if you actually get better.

In our view, the most important role of an advisor is not to prescribe the best solution, but to diagnose the problem first and to help by setting some long-term goals.

With clear goals that reflect your life stage and unique circumstances, it’s easy to stay focused on what is important.

 

2. Complexity and noise to simplicity

Most people don’t understand risk well enough to know what level of risk they are willing or able to take. Emotion plays a role in answering these questions. We believe an empathetic and analytical advisor is far better positioned to help come up with suitable solutions. This always trumps a series of generic questions.

Unfortunately, standardized questionnaires are widely used by advisors and can lead to inappropriate advice.

This often coincides with a variety of solutions presented to a client. This can also cause major angst because at the end of the day – how many of us actually understand which risk profile we fall under.

Advisors are also notoriously good with the technical stuff but make it too complex for people to understand. Add to that all the variety and clients are left confused. Complexity does not equal intelligence in money matters.

At Foundation Family Wealth, our sense is that people want clear guidelines and simplicity. It may be a complex process to get from A to B, but the most important thing for a person is just to get from A to B. Advisors that can do this in a clear and understandable way, add REAL value – often undervalued by the client.

3. Being mindful of human behaviour

Research shows that investors consistently underperform relative to the market benchmarks over time (https://www.dalbar.com/QAIB/Index). This is a global phenomenon driven by investor behaviour.   Advisors are not immune to making behavioural mistakes, however REAL advisors are aware of the problem and guide investors through market uncertainty and volatility. Sometimes it’s difficult to sit still or to stick to the same strategy, but often that’s exactly what you should do. This is again an important advisor skill underrated by clients.

 

4. Being a generalist

A skilled advisor can tie large areas of expertise such as investments, tax and estate planning together when making investment decisions and selecting appropriate products. Understanding the impact of tax on certain investments and staying on top of regulatory changes can add significant value when constructing an investment portfolio.

Tax structures and legislation changes a lot – which means that products and structures need to be reviewed and adjusted accordingly. The recent changes to trust legislation are a good example.

Having an advisor that can combine these skills and expertise and take into account your personal circumstances and your family situation, will not only save you time and money but will add significant value to your life.

 

5. The way you make me feel

It’s hard to quantify or explain, but sometimes we just go with our gut. We go with what feels right. An advisor that listens, shows empathy and asks strategic questions is more likely to get my business than the arrogant salesman. Foundation’s motto is Wealth for Life. This not only refers to preserving our clients’ wealth and capital for life, but also to using that capital to fund REAL life for you and your family. It also speaks to preserving the relationship between us and our clients.

So, next time you question your advisor fees or read about cheap do-it-yourself solutions, ask yourself what REAL value you’re getting in return.

Do you currently have a financial advisor or a REAL financial advisor? A good doctor has the ability to diagnose and treat a serious condition and possibly save your life. No wonder we don’t mind paying their fees. Similarly we believe that a REAL financial advisor can add significant value to your life that far outweighs their fees.

 

Credit to Carl Richards for his graphs and inspiration. And we can’t rave enough about his brilliant book. Read more here: The Behaviour Gap Book

 

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