When I was a young parent, my dad gave me a piece of parenting advice that probably changed the course of my life and saved me and my children from the trauma of helicopter parenting. It freed me to enjoy my children as unique humans.
If I had to pay for that advice, I wonder what it would be worth? My dad’s advice did not have an immediate impact on my life – the value emerged over years and illustrated for me that the value of advice is difficult to measure. It is not easily quantifiable or tangible.
When I talk about advice, I mean more than someone telling you something of worth. I also include the ability of the advisor to ask a good question or to listen well so that you come to your own insight. This kind of insight can be invaluable – be it recognising a subconscious behaviour pattern that is damaging or highlighting a risk in a decision you had previously not seen.
The same is true of financial advice. How much should you pay for it and how much is it worth? How do you compare the price of advice, when not all advice is made equal? And how do you gauge what the advice will be worth in the future?
The narrative in the media around fees is not helpful– local media has emphasised the importance of lower fees. While it’s good to be cost-conscious, losing sight of the value of, and the expertise behind, good advice can hurt investors rather than help them. The cheapest advice may not be good value for money. Worse still, may be going it alone with your money.
Studies all over the world show that those with advisors are better off than those without advisors. One such study of real investors by the Investment Funds Institute of Canada showed that just by changing an investors asset mix, advisers added 83 basis points per year net of their fees above non-advised clients. In other words, those who pay for advice, get more than their money’s worth for that advice. But further than that, a Vanguard study showed that advisors can add, on average, 150 basis points just by helping investors stick to their long-term strategies.
Other studies have shown that clients benefit significantly from personalised withdrawal or retirement strategies. For example, just by advising someone to retire a few years later or contribute a few thousand Rand more per year, an advisor can significantly increase the chance of a successful retirement.
In 2020, advisors probably earned their fees just by keeping their clients invested in their long-term plans. The difference between selling out of long-term plans in March or holding on was in excess of 30% in most portfolios. Capitulating or giving in to the urge to ‘do something’ robs investors of the long-term rewards of their investment strategies – some studies even show that more than half the market return is given up by fiddling with investment strategies.
The premise of those who advise investors to hunt for the lowest fees is that investors will by default get the returns available in the market. However, numerous studies show that achieving market returns is neither a given nor a circumstance of default. Actual long term returns hinge on behaviour that is directly opposed to automatic human responses.
Helping clients through these trying times and traumatic personal events is probably the single most important skill an advisor can bring to bear. It is probably also the most underrated and undervalued skill. It requires grit on the part of the advisor and a skillful handling of difficult conversations.
A skilled advisor is no longer just a professional person in a suit, with the requisite qualifications, experience and strategies, on the other side of the table. It is now a person who, with empathy, can coach, consult, advise and know when to do what. They deliver far more than just helping you choose a good product – they deliver an experience that will help you choose well for yourself. It is in part also a journey of mentoring clients towards self-knowledge. The cost of running such a compliant and client-friendly advisory business is substantial, not only due to the increased regulatory scrutiny and client demands but also due to the ongoing training and development of expertise required for that kind of relationship.
Yes, there are still dubious salespeople in our industry, but I see a growing profession of increasingly skilled advisors in South Africa. It pains me then when the media and the passive industry only highlight the lowest examples and people who need advice shy away from it; or when pressure is placed on advisors to lower their fees when they are delivering value far in excess of their cost to the client.
Seek value for money when it comes to advice, not the rock bottom price. You don’t do that when you buy a car or a house. Why do it when you engage with one of the most important relationships in your life?
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// 11 September 2020