Investment firms are developing different approaches to assess how advice contributes to improved client outcomes
As clients become less convinced that they can get better outcomes simply through investment advice and services, advisors are left with two choices: accept lower compensation or justify the value you deliver in other areas. Neither one is easy for an advisor — but the second option is becoming decidedly less difficult thanks to the arrival of new frameworks.
Earlier this year, Russell Investments came out with a formula that sets out the cumulative value offered by a typical advisor. It consists of five factors:
- Annual rebalancing – according to the firm, advisors must teach clients the benefits of a systematic rebalancing policy, what their strategic rebalancing policy is, how frequently the portfolios are rebalanced, and how strategic rebalancing is done during volatile periods in the market;
- Behavioural mistakes – advisors can coach clients to avoid biases that lead to self-sabotaging money decisions including loss aversion, overconfidence, and herding;
- Cost – focused on basic investment-only management, advisors can become more effective in this area by properly leveraging technology and skilled outsourcing partners;
- Planning – rather than a perfunctory box-checking exercise, planning services should incorporate an awareness of goals, circumstances, and preferences, as well as a continuous process to monitor progress; and
- Tax-efficient – advisors should consider and pursue strategies that appropriately minimize the taxes their clients have to pay.
That framework is fleshed out in more detail in the 2019 Value of an Advisor Study, which was published by Russell Investments Canada in May. In an interview with The Globe and Mail, Sophie Gilbert, head of business solutions at Russell Investments Group LLC in Seattle, said that those five factors combined work out to 4.6% for advisors working in the U.S., 4.4% for those in Australia, and 2.8% in Canada.
For its part, Vanguard recently released a paper on its three-dimension framework of advisor value based on research on client data from its Personal Advisor Services (PAS) platform:
- Portfolio Value – while the proper way to measure value in a portfolio is debatable, Vanguard’s approach focuses on diversification that generates better after-tax, risk-adjusted returns net of all fees, while suitably matching the client’s risk tolerance;
- Financial Value – similar to Russell Investments, Vanguard’s research highlighted how advisors can help guide their clients’ spending and saving behaviour, debt management, estate planning, and other parts of their financial lives to attain specific goals; and
- Emotional Value – focused on the advisor-client relationship, this dimension incorporates aspects such as advisor trust, behavioural coaching, and the investor’s own sense of confidence, all of which can contribute to their feeling of financial well-being.
“Our results highlight the need for a broader advisory industry investment in value metrics,” the firm’s researchers said in the associated paper titled Assessing the value of advice. “As the industry grows in scale and impact and the emphasis on investor value continues, additional data-driven benchmarks will be needed to evaluate advisor quality and efficacy.”