Reframing the value of professional advice
29 March 2018 | Topical insights
Commentary by Robin Bowerman, head of market strategy and communications for Vanguard in Australia.
The financial advice industry is living through interesting times.
Disruption really began back in the years leading up to the global financial crisis with a series of scandals hitting major advisory firms. The result was a set of new licensing regimes in many countries that sought to enforce advisers' mandate to act strictly in their clients' best interests. Governments have also moved to improve the professional and educational standards of the advice industry by enforcing educational and ethical standards.
At the same time, greater transparency and disclosure on fees are helping investors understand how much they are paying for advice services, while improvements in technology are giving investors access to digital or "robo advice" services at lower costs.
In a recent presentation, Vanguard's global head of portfolio construction, Fran Kinniry, called out the following key influences impacting the advice industry:
- Strong emphasis on transparency and client best interest.
- Clearer value proposition taking into account relative costs and outcomes.
- New entrants leveraging technology lowering costs.
- Acceleration to a fee-based charging model.
- A more active global regulatory environment.
Vanguard is a strong believer in the value of advice. Back in 2014, Mr Kinniry's team quantified what we call Adviser's Alpha. The research defined a figure of about 3% on the value added by an adviser for an average client.
That research effort has now evolved further to highlight areas where advisers should focus their efforts to add value to clients.
In many ways, advisers created misconceptions about the value they can add. In the old model it was all about picking winning investments. In the new world, Mr Kinniry argues, advisers will move "from portfolios to people".
He urges advisers to embrace efficiencies that technology can offer – such as automating basic and repetitive tasks – whether that be through advice solutions embedded in product designs or the delivery of digital advice at lower cost.
The work of the future will continue to shift to more advanced tasks, Mr Kinniry says. In the adviser world this will centre on behavioural coaching, relationship management and customised estate and wealth management services.
For example, rebalancing has been very hard for investors and has meant they commonly receive much lower returns from the funds and portfolios they invest in.
Vanguard's research looks at the shift in investor asset allocations in the United States since 1992. It shows how investors shifted from equities to bonds and back again through various market cycles. In 2000, ahead of the dot-com market crash, investors had 62% invested in equities. By 2003 that was down to 40%. Then, as the market climbed, investors again had allocated 63% to equities just prior to the global financial crisis. This is clear evidence of trend following, or chasing past performance.
The point is that rebalancing a portfolio is counterintuitive, Mr Kinniry says, and goes against most decisions we make successfully every day.
The task of coaching an investor through this and other investing behaviours is uniquely human – and requires a deep and trusting relationship between adviser and investor. Kinniry believes the financial advice industry will continue to evolve in the next few years into a more service-centric model that reframes the benchmark for the value of advice.
That will be good for both investors and their advisers.
Head of market strategy and communications, Vanguard Investments Australia
This article is directed at professional investors and should not be distributed to, or relied upon by retail investors.
This article is designed only for use by, and is directed only at persons resident in, the UK. It is for educational purposes only.
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Past performance is not a reliable indicator of future results.
The information on this article does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this presentation when making any investment decisions.
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Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority.