The key value of advice in a fast changing world

By John Astrup, manager, savings and investment propositions in the Middle East, Zurich International

Added 29th July 2016

In the increasingly and often unnecessarily complex world of personal finance, the biggest value of a financial adviser may be in managing customer behaviour, argues John Astrup, who runs the Zurich savings and investment propositions in the Middle East.

The key value of advice in a fast changing world

From 1400 to 1900 millions of people died from a single disease. While this is tragic it is not altogether unprecedented in the history of humanity. But what is unprecedented is that all along this 500-year period, a cure for this illness - a simple, affordable, widely available cure for this illness was discovered again and again and again.

But it was not until 1935 that American physician, Charles Glen King, discovers Vitamin C and we officially discover the cure for scurvy. So why did it take us so long to discover the cure?

Scurvy was deciding whether armies had the strength to fight or not, but every solution put forward was laughed at as being too simple; people thought that this terrible disease could not be cured with lemons and lime. That is way too simple; there must be a more complex answer.

Return gap

The real-life return of the average investor is dramatically lower than the return of the average mutual fund. In theory, this gap shouldn’t exist, but investors are leaving money on the table and we don't seem to understand why this is is happening.

We end up looking for a complex answer to this problem with more data and more analysis. What we observe is that so often investor behavior becomes dislocated from their own personal goals – we see investor emotions driving decision making.

"Hand holding customers behaviour is put at 50% of the value an adviser adds."

In the financial industry our long-standing problem is that of trying to manage investor behavior, so is there a simple answer readily available for us?

Advice value

A survey from Aon Hewitt shows that over a 10-year period that individuals who took a ‘do it yourself’ approach to investing were 1.86% worse off each year than those who used a financial professional. What they found during the most volatile five years of this time period for equity markets, is that the effect jumped to 3%.

A Vanguard study into the value of investment advice puts this at 3% annually on average and actively assigns a basis point value to all the services and adviser provides, from wealth planning, asset allocation and most importantly to managing customer behaviour.

Hand holding customers behaviour is put at 50% of the value an adviser adds.  If an additional 3% doesn’t sound like a lot, if I have a 30 year investment horizon, that 3% additional I get each year from using an adviser has the potential to strongly enhance the size of my retirement pot.

Most clients think that a financial adviser should manage their wealth and this is the biggest value that they add.

Rare skill

However, in a world where personal financial issues have become increasingly and often unnecessarily complex, a good adviser can help clients figure out what matters, what is useful, and what can go wrong. There are few enough people with the expertise sufficient to begin to do that for themselves. Nobody can do it objectively.

That’s why good advisers are an absolute necessity. Our own behaviour is the biggest single barrier to us achieving our long term savings and investment goals. Ultimately, a good adviser can and will influence and even change client behaviour. 

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