Financial advice just as valuable in rising markets as in downturns

The gyrations in global stock markets in August provided clear evidence that financial advice remains a critical service for many Australians.

The thrill of stocks reaching new peaks in previous months – including AI giants like Nvidia and local stalwarts like Commonwealth Bank – had likely proved sufficient for many investors to abandon caution in the belief that “it’s different this time” and resist sensible asset allocation.

Those who instead sought adviser’s expertise in reweighting portfolios at regular intervals were far better placed to avoid the common trap of chasing quick investment wins, then bailing when markets dipped.

Russell Investments’ 2024 Value of an Adviser report shows that such behavioural coaching remains an important component of the counsel that financial advisers provide. The annual analysis reveals the overall value of an adviser in Australia in 2024 is approximately 5.7 per cent or substantially higher than the typical fee they charge.

This is calculated by adding together the value generated by asset allocation advice (1.1 per cent), behavioural coaching (3.3 per cent) and tax planning (1.3 per cent). Of course, advisers offer other invaluable services that cannot be quantified, such as technical and emotional expertise, as well as financial coaching.

In 2024, the net result of this advice has allowed people to balance the competing emotions triggered by strong investment returns and a cost-of-living crisis. Advisers not only helped clients stick to their asset allocation but also encouraged them to retain dollar cost averaging as inflation ate into household budgets.

Beyond investing

Advisers who forge solid relationships with clients are best placed to convince them of the merits of maintaining the strategies formulated on their behalf. These strategies extend beyond investing to the complex choices and trade-offs that typify modern living.

For example, a growing number of single retirees (particularly women) are significantly underfunded for retirement and at risk of losing their homes late in life without proper planning.

Younger generations may benefit from higher compulsory super payments than their parents, but inflated housing costs and HECS repayments can deter them from implementing broader plans to build wealth.

And a growing number of older Australians are contending with “impatient inheritors” – the cohort of adult relatives who want an early bequest, or who coercively take control of an aged person’s money and assets. Advisers are among the first lines of defence that protect people from such demands.

Couples can also be encouraged to adopt strategies that give them a degree of financial independence within a relationship, so that neither is left without assets if their partnership ultimately breaks down.

Each of the above scenarios can require detailed arrangements to achieve an optimal outcome and ensure family relationships aren’t fractured.

Additionally, advisers can assist in striking loan agreements for parents providing mortgage deposits to adult children. By working closely with other specialists such as lawyers and accountants, they can develop solutions which protect the interests of their clients.

Advisers work closely with clients across all life stages to negotiate such challenges, from early adulthood (when they are accumulating assets) to late middle age (when they are planning retirement) and to older age when care requirements may be significant.

Russell Investments’ Value of an Adviser formula shows the real value of this work. It highlights the fact that financial advice is about much more than investing. It requires in-depth knowledge of taxation, superannuation and social security, plus the understanding of human behaviour required to support people making difficult decisions.

It shows that even if advisers were only able to help people avoid common errors, they likely provide sufficient value to earn their fees. But once their other services are included – asset allocation, expertise, and tax planning – the total value of their advice is perhaps priceless.

Neil Rogan is the managing director and head of distribution, Australia and New Zealand at Russell Investments.