Financial advice: An equation of skills

The biggest challenge for financial advisers in 2023 lies perhaps not in volatile markets but in convincing clients there is irrefutable value in the counsel they provide.

Misconceptions about the industry remain prevalent, even though many Australians relied on advisers for support over the past year as the spectre of a global recession and rising inflation hung over investment markets.

Adviser support went beyond practical tips to the emotional reassurance required when volatility tests investors’ nerves.

Of course, financial advice encompasses much more than investing. It requires in-depth knowledge of taxation and social security, plus the understanding of human behaviour that’s necessary to support people making life decisions.

Advisers are more than up to all these tasks. In fact, Russell Investment’s annual analysis shows the value of an adviser in Australia is approximately 5.9 per cent in 2023.

This number is higher than the typical adviser fee paid by clients and a validation of the total service that advisers provide. It is a function of an adviser’s ability to help clients adapt as markets, regulations, and their own circumstances change.

The overall figure is calculated by determining the potential value investors gain from asset allocation advice (1.2 per cent), behavioural coaching (3.4 per cent) and tax planning (1.3 per cent).

Asset allocation is a good example of an often misunderstood aspect of financial advice. It is central to every investment strategy, determining more than 85 per cent of the outcome for an individual ahead of the selection of the actual assets within a portfolio.

But retail investors are more inclined to remember the returns of individual stocks – such as this year’s gains from the so-called magnificent seven AI stocks – than how asset allocation laid the foundation for overall risk-adjusted returns.

Priceless skills

There are other services provided by advisers on which it is not possible to place a specific value.

In the best of times, they help clients achieve life-long goals and celebrate personal milestones along the way. But they also support people in challenging times – such as trauma, illness, financial crises, job loss and death.

The unique combination of technical skill and emotional expertise demonstrated by advisers provides a priceless form of value to their clients.

In terms of technical expertise, it’s clear regulatory change and product innovation are constants in Australia’s financial system. Advisers are at the front line of interpreting such reforms to determine both the impact and, of course, opportunities for clients.

Retirement planning is a particular example where professional advice is almost essential. Legislative change and product innovation are quickly broadening the decisions both pre-retirees and retirees must consider as they age. The impending retirement of the majority of the Baby Boomer generation means more people than ever must establish income streams, make aged care decisions, and undertake robust estate planning.

But each of these decisions is not just financial – it involves a multitude of emotions as people leave the workforce and plan their final decades.

Continued economic uncertainty and policy reform provide an opportunity for advisers to reassess the full value they offer to their clients – and to articulate it to them clearly.

Russell Investment’s Value of an Adviser formula shows that even if advisers were only able to help people avoid common behavioural mistakes, they have likely provided value above and beyond their fees.

But once their other services are included – asset allocation, managing choices and trade-offs, expertise, and tax planning – the total value of advice is clearly significant. Truth be told, the role of a financial adviser is becoming even more critical in a complex world that continues to throw up challenges to everyday Australians.

Neil Rogan is managing director, head of distribution in Australia at Russell Investments