Quantifying the value-add of financial advice

The value of advice is quite difficult to quantify, as it covers a very wide range of aspects. However, these days there is a substantial body of global research that demonstrates measurable, quantitative value for financial advice. There is considerable evidence that this added value derives from various aspects, including improved savings discipline, tax-efficient structuring, better asset allocation decisions, and behavioural coaching to avoid costly mistakes. In addition, the better results from advised investing contribute to greater peace of mind for clients, more success in meeting financial goals, and better preparation for retirement and emergencies, all non-quantifiable benefits that are, in fact, invaluable.

Evidence of value added
Most recently, the November 2022 Whitepaper “Financial Advice in Canada” highlighted several different studies that affirmed the value of financial advice. Perhaps the most well-known of these is the Russell Investments’ “Value of an Advisor” study, conducted annually in the US for several years now.

In its 2022 report, Russell found that the approximate value of a financial adviser to their client was 4.91% – in other words, they added a net 4.91% to a client’s total return for the year. They broke this total value into four components:

1. 37% from behavioural coaching – preventing clients from moving to low-risk assets or selling out of their portfolios during market downturns, and therefore locking in losses;
2. 22% from tax-efficient investing and planning;
3. 21% from informed asset allocation choices and family wealth planning (involving insurance, accounting, trusts, etc); and
4. 11% from active portfolio rebalancing.

Other interesting US research found that those investors with financial advisers prior to the 2008 Global Financial Crisis (GFC) on average lost significantly less money (6.25% less) and experienced less wealth volatility than unadvised investors, after accounting for the level of risk taken, partly because they were less likely to make costly mistakes like selling equities in a downturn (Grable & Chatterjee, 2014).

In Canada, the “2022 Mutual Fund and ETF Investor Study” released jointly by the IFIC and Pollara in October 2022, found that 80% of unit trust investors and 73% of Exchange Traded Fund (ETF) investors stated that they believed they received a better return on their investments due to the advice they received from their adviser, with 74% and 64%, respectively, saying they had better saving and investing habits due to them.

Another study, the “Value of Advice Report” by Canada’s CIRANO Institute in 2018, found that after 15 years of investing, advised investors had accumulated 2.3 times more assets compared to their unadvised counterparts. And even after only four to six years of investing with an adviser, clients had built up 1.58 times more assets. The factors identified as contributing to this better outcome were higher savings rates, a higher allocation to non-cash investments (i.e., high allocation to risk assets in order to match longer term liabilities), and better, disciplined behaviour through market downturns.

No time like the present for an adviser
It makes sense that in South Africa financial advisers can add at least as much value as in these developed country studies – and since our financial markets experience even more volatility due to their higher levels of risk, financial advice could conceivably be even more valuable. The current investing conditions are ideal for demonstrating this value, both in terms of actual investment returns and less quantifiable types of support. This is because periods like this – with most asset valuations cheap after having sold off through much of 2022, and market conditions highly uncertain and volatile – have been found to be when financial advisers can add the most potential value to client outcomes.

South African investors are understandably nervous and worried about the gloomy economic conditions both locally and globally: slow growth (and a possible global recession in 2023) paired with high inflation and interest rates are top-of-mind. Exacerbating matters is that 2022’s poor performance follows several years of pain from disappointing market returns already (especially longerterm domestic market returns). No one wants to see their investment values continuing such low growth or even falling further. This type of fearful mindset makes it easier to succumb to common human behaviours like short-term thinking, acting out of emotion, selling assets when markets are down, and being too conservative in investment choices. This is where behavioural counselling by a financial adviser can help to avoid costly mistakes like these, and to stay invested during the perpetual ups and downs of financial markets over time.