With the rise of low-cost investment options such as robo-advice and ETFs, many are questioning the value of financial advice. That scepticism has caused the expected “fair” value of fees to go as low as 1% — but a new paper suggests that it’s a disproportionate drop.
According to a new report on the value of Canadian advisors from Russell Investments
, advisory fees should amount to 2.88%. The report takes into account not only investment management, but other services that advisors deliver to wealthy clients.
“Robots may be taking over package delivery and the automobile industry, but we know that the needs of wealthy investors often require customized advice rather than patterned response,” it said.
Part of that customized advice is through annual portfolio rebalancing, which the report said could add up to 0.2% in returns and reduce risk by as much as 0.7%. Aside from accounting for “irrational” market conditions, advisors can also rebalance portfolios based on client’s end goals, their future needs, and life events they face, which robo-advisors can’t easily replicate.
Another aspect is behavioural coaching, which could prevent up to 0.9% in losses due to individual investors’ behavioural mistakes. A good advisor can help clients avoid pitfalls such as chasing past performance in investments and other emotion-based decisions that aren’t well thought-out.
Basic investment-only management was given a rate of 0.4%, the second-least weighted item in the fee calculation. The report noted that clients get this from robo-advisors with minimal support, offering “no financial plan, no ongoing service, no guidance, nothing except for an annual statement, online access and a phone number to call in case of questions.”
The report assigned 0.75% for planning costs and ancillary services. Planning involves building and updating financial plans with ongoing goal and risk-tolerance monitoring, valued at 0.5%. The 0.25% for ancillary services, meanwhile, covers work like guiding clients through financially significant periods and addressing questions and requests. “These additional services can quickly consume 20, 50, or 100 hours each year,” the report said.
Finally, tax-aware planning and investing, which includes finding tax-efficient investment options, guidance on tax-advantaged savings accounts, and on advice on available tax credits, was given a value of 0.63%
“For many advisors, this means the value they deliver is worth more than the fee they charge their clients,” the report said.
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