Financial advisors deliver value of 5.2% annually or more each year to their clients in a relationship that extends beyond investment-only advice, Russell Investments reported this week.
The estimate is based on a formula the firm developed to help advisors understand and communicate the full value of their services: A+B+C+E+T = value of an advisor.
“We believe advisors have never been more valuable than during this challenging time,” Bronwyn Yates, head of business solutions at Russell Investments, said in a statement. “The pandemic has further strengthened the awareness of the value that advisors provide for their clients.”
Yates acknowledged that some clients experience sticker shock when they see advice fees for the first time.
“Our report shows that an advisor charging an advice fee of $3,250 to a client with a $250,000 balance can potentially deliver $13,250 of value — that’s $10,000 extra value to the client,” she said. “Our report aims to help advisors move beyond a fee conversation and amplify their value creation capabilities.”
Here’s a breakdown of the formula:
- A is for Appropriate asset allocation, helping clients to work through their values, preferences and motivations from the outset.
- B is for Behavioral mistakes. Helping clients avoid common behavioral tendencies may help achieve better portfolio returns than those investors making decisions without professional guidance.
- C is for Cost of cash. Advisors can help clients invest in a well-diversified portfolio that seeks to balance their need for liquidity and growth within the risk levels appropriate to the client.
- E is for Expertise. Quality financial advice goes way beyond the common misconception that financial advisors are purely investment managers, whose only job is to select investments and achieve a certain level of return.
- T is for Tax-effective investing. Advisors play an important role in helping clients navigate key components when it comes to tax-efficient strategies.
More Than Just Investment Management
According to the report, an advisor’s ability to help investors avoid making behavioral mistakes, such as chasing short-term market volatility or past performance, added at least 2.2% annually of additional value for their clients’ portfolios, making it the formula’s biggest contributor.
Russell Investments said it observed that during the pandemic, many investors were so fearful of loss as the market fell that they switched predominantly to defensive assets, or entirely to cash, just before it hit bottom on March 17, locking in substantial losses.
The report estimated that someone with an investment balance of $250,000 who sold to cash on March 16 would have locked in losses of more than $50,000. In contrast, an investor with the same balance who stayed invested during the volatility would have recovered almost $20,000 by the end of May.
Tax effective investing was the next biggest contributor, representing 1.5% of added value.
Although tax is often considered the realm of the accounting profession, advisors can also provide expertise on managing and optimizing investment tax for their clients, the report said.
Advisors can add significant value to a client through structural tax strategies to manage investment tax. This requires both a close understanding of the client’s needs and knowledge of innovative investment solutions that can help manage personal tax circumstances, such as managed account solutions.
The report noted that Russell Investments rolled out a next-generation suite of multi-asset managed accounts last year.
Managed account solutions allow advisors to tailor an investment solution based on the taxation circumstances of an individual, according to Neil Rogan, head of the firm’s wholesale partnerships. The efficiency of managed accounts also allows advisors to spend more time engaging with clients.
“While dedicated advisors are confronting challenges as volatility whipsaws many investors’ savings, they also need to articulate that the value they deliver goes far beyond selecting and managing investments,” Rogan said in the statement.
“By demonstrating to clients how the value they deliver exceeds the fees charged, advisors can improve client engagement and satisfaction at a time of extreme market uncertainty.”