One of the hardest questions to answer in a social or networking situation is what value does a client get from having an IFA? All IFAs believe they add value by using their skill and judgement to develop an investment strategy for a client, but a claim in any more than anecdotal form is likely to land the boastful adviser in hot water with the Financial Conduct Authority, the Advertising Standards Authority and any right-thinking person’s bulls*** detector!
Vanguard, (the US based index fund provider, with a UK outpost), has given a likely value of professional advice of around 3% additional return in a document published in March 2014, “Putting a Value on Your Value: Quantifying Vanguard Adviser’s Alpha”, available at http://www.vanguard.com/pdf/ISGQVAA.pdf.
This “about” 3% value is given a few health warnings, covering client’s specific circumstances, that the 3% will not be delivered evenly and that although Vanguard offer a suitable strategy, an adviser might go elsewhere, so I am not convinced too much can be read into it, but the basis for the calculation is of interest.
Vanguard suggest that advisers add most value, 150 bps, (1.5%), by providing behavioural coaching to their clients. People are not good at making the best decisions for long-term investment growth, as they have a number of personal biases, usually explained in terms of behavioural economics. An adviser needs to explain and harness the client’s gut instincts to keep assets to the desired plan.
The other elements that make up the 3% are:-
· Suitable asset allocation using broadly diversified funds/ETFs, > 0 bps
· Cost-effective implementation (expense ratios), 45 bps
· Rebalancing, 35 bps
· Asset location, 0 to 75 bps
· Spending strategy (withdrawal order), 0 to 70 bps
· Total-return versus income investing, > 0 bps
This second 150 bps are all usual IFA activities, but more mechanistic rather than behavioural, so a key message is that the client/adviser relationship has to be a close working partnership, rather than a master/servant or student/teacher relationship.
For our clients, I would be grateful for some feedback; what value would you place on your adviser’s input? For prospective clients; can you afford not to take formal financial advice? Remember, 3% compound interest gives a doubling of value every 24 years.
If you would like to know more about how we can help you plan and realise your financial goals then contact us at firstname.lastname@example.org or call us on 01223 792 196.
The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.