What is the value of an adviser?

The report by Russell Investments looked holistically at the real value advisers deliver for their clients, from knowledge and expertise all the way to additional wealth management services.

The report is designed to support the advice community and help them have the difficult fee conversation with their clients who may not understand their value.

Managing director of Russell Investments Jodie Hampshire said advisers were under extreme pressure in the wake of the royal commission and this report was designed to help.

“We think adviser value far exceeds the amount they are charging their clients and, more importantly, the report is providing them with a framework to have a really sensible conversation around fees versus value with their clients confidently,” she said.

Ms Hampshire said in Russell Investments’ estimation the average investor gains a number starting at 4.4 per cent per annum through a lifetime advice partnership, which could make a huge difference in the assets for most Australians.

“A common misconception we see is that advisers are just investment managers picking the solutions to deliver a particular return outcome. What we show through our report is that the value of advice goes way beyond this,” she said.

The formula Russell Investments used was what it called the ABCs of adviser value, with A standing for annual rebalancing, which it did not put a number against.

“Rebalancing is in our view a key positive value out of advice but we haven't put a number on it for this report – we've just considered it variable, because it really depends on the time period, on the investor’s risk profile etc,” Ms Hampshire said.

B was for behavioural mistakes and how advisers help train clients out of buying high and selling low, among other investment mistakes, of which there were over 200 identified behavioural issues that could impact investing.

“By avoiding just one behavioural bias of herding, advisers can add something like 1.9 per cent per annum,” she said.

“The way we’ve calculated that is based on the longest data we have and the most robust data we have around inflows and outflows based on the Russell 3000 index in the US. So, it’s a proxy for the Australian market, but we’d hazard a guess that it would be even more pronounced in the Australian market.”

C was for the cost of getting it wrong, so for younger clients it is coaching them to accept more risk to grow their portfolio and then change over time, something Russell Investments calculated to add 1.6 per cent of value per annum.

“C is around the cost of getting the investment approach wrong for an investor instead of having something better tailored to their age and circumstances – so these three things together, so far we’re up to 3.5 per cent per annum pretty easily,” said Ms Hampshire.

The last two elements were the benefit of planning and tax-smart investing (P&T), with planning given a variable value based on the other wealth management services offered by the adviser.

“We can’t put a value on this aspect of the advice relationship so we’ve called it variable and we haven’t added a number for this in the report but we want to acknowledge that it’s potentially ‘priceless’,” she said.

The last was tax smart planning and investments and the technical expertise that advisers added to give clients the most out of their tax circumstances.

Ms Hampshire said Russell Investments valued this at between 90 and 120 basis points per annum depending on where the client was.

“Having somebody who is up to date with tax issues and can keep you from falling foul of the ATO is really, really important and actually delivers true quantifiable value,” she said.

Overall, these tools were to help advisers demonstrate their value to their clients and Russell Investments found that to be worth a starting value of 4.4 per cent per annum.

Eliot Hastie

Eliot Hastie is a journalist at Momentum Media, writing primarily for its wealth and financial services platforms. 

Eliot joined the team in 2018 having previously written on Real Estate Business with Momentum Media as well.

Eliot graduated from the University of Westminster, UK with a Bachelor of Arts (Journalism).

You can email him on: [email protected]