There are six consistent pitfalls that a typical unadvised investor will encounter when they are not instructed by an IFA, according to financial services firm Quilter.
The firm’s research coincided with the launch of Adviser Delta, its formula which aims to “quantify the emotional and empirical value” that advisers deliver for clients, on an annualised basis.
The study was carried out on its behalf by independent investment educator Boring Money and found the following issues about unadvised investors:
- They do not diversify;
- They are almost wholly-equity based with a big brand or UK bias;
- They have no asset allocation with mostly shares or nothing;
- They buy what is in the press and on best performance tables;
- They hardly ever rebalance their allocation; and
- They look for stock replacements rather than diversification when markets decline.
Boring Money carried out surveys, face-to-face interviews and examined unadvised portfolios of UK investors.
Convincing the public
Andy Thompson, chief executive of Quilter’s advice business, said during an event attended by International Adviser: “One of the mysteries of our industry is if you talk about financial advice it is not well trusted, we are pegged in there with the estate agents.
“But if you talk to clients of advisers, the level of trust they have for their adviser and what they are getting is really high. Post-retail distribution review (RDR), the nature of the relationship has changed, year-on-year.
“An element of Mifid II which kicked in this year was the retrospective disclosure, once a year advisers have to say to customers what charges they have had in the preceding 12 months for the advice, platform and investment management.
“Customers now rightly questions the transparency of what we do.
“We struggle to explain it and so we become our own worst enemies as people don’t trust the industry. They are not convinced of its value and believe they can achieve their financial goals on their own.”
Delta
The firm has identified three elements in an equation which can be measured to express the value of a financial adviser through a numerical value, which will show them the “pitfalls” of unadvised investors.
The elements are:
- How is the investment held
The value an adviser adds by placing assets in the right name, with the right beneficiary confirmed, and using the most efficient tax shelter, help ensure good client outcomes. This means clients do not unnecessarily lose money to HM Revenue and Customs, or unnecessarily impact their welfare benefits and support. - Enhancing the investment solution
The impact of properly managed portfolios in terms of asset allocation, diversification, rebalancing, monitoring and ongoing suitability. - Behavioural coaching
The value an adviser adds by ensuring their clients do the right things, at the right time, to realise their financial goals. For example, stopping them from over trading and preventing them from “panic selling”.
Adviser Delta aims to focus on advice rather than product, to compare the benefits advised customers receive versus non-advised consumers.
By focusing on case studies based on specific client profiles, Quilter aims to demonstrate how the Delta formula can be tailored to clients’ individual circumstances.
Some 753 advisers from Quilter’s IFA network Intrinsic used Delta during its soft launch during conversations with their clients.
Explaining the small things
Paul Young, head of business consultancy at Intrinsic, said during the event: “Advisers have three things in common – they have a risk based [conversation], pressure test risk appetite and diversify for the client.
“It is what they do across the UK. They spend a lot of time doing that.
“But when it comes to discussions about whether it should be in one particular’s name or in a trust/ISA – they happen so quickly.
“That is what their exams are about so it is very easy for them, so they spend their time talking about the strategy.
“Actually, you can go online and check attitude to risk. But asking about what tax shelter or product should be used is not an easy conversation.
“Advisers do it so quickly but it is probably the hardest thing to do with advice.”
Client use
“Trust is where value lies,” Young added. “Our aim is to have something client facing.
“Our first part is to go to scenarios. Majority of client scenarios will give us a good fighting chance of helping people with the template.
“Because you have to change details for each person; eg age, tax, partners pension – it could affect the Delta figures.
“The other key thing is that this is a concept that can be applied to clients.
“If you just sit and listen and the adviser shows how you can identify the provisions, then it will identify the value of an adviser and the advice.
“We now have adviser conversations on what value do they add.”
