How can a financial adviser add value on your path to retirement?
It’s the ultimate question when it comes to putting your financial future in the hands of a trained professional. Fortunately, we can provide some hard facts and figures on the subject courtesy of investment research firm, Vanguard.
According to a whitepaper Vanguard wrote in August 2019, a good adviser now adds value through relationship-oriented services like financial planning and financial coaching, rather than trying to outperform the market.
They define seven key elements in the paper and how they can add value to your annual returns. We’ve summarised them here:
1. Asset Allocation
Asset allocation refers to the percentage you invest in various asset classes such as shares, property, and cash investments. Where you put your assets has the greatest impact on investment returns and the long-term performance of a diversified portfolio. A good strategy and use of an Adviser here help ensure you don’t panic when share markets fall or get too greedy when markets are running hot.
Potential Value Add: Value added by asset allocation is significant but too unique to quantify for individual investors. Each investor’s portfolio, time frame for investment, and attitude to risk is different.
2. Cost-Effective Implementation
A critical component of every adviser’s tool kit is the simple math of costs and net returns for clients. Every dollar paid for management fees, transactions, and taxes is a dollar less of potential return. Cost-effective implementation is a ‘win-win’ for clients and advisers so making sure you get what you pay for is important.
Potential value-add: 0.34% annually, by moving to low-cost funds. When you pay less, you keep more, regardless of whether markets are up or down.
Given the importance of asset allocation, it’s also vital to maintain that allocation. As investments produce different returns over time, a portfolio can ‘drift’ from its target allocation, acquiring new risk-and return characteristics that may be inconsistent with your original preferences. For example, a portfolio overweighted to shares is more vulnerable to share-market corrections, putting you at risk of more significant losses compared to investing in a balanced portfolio.
NOTE: the goal of a rebalancing strategy is to minimise your risk, rather than maximise your return.
Potential value-add: Up to 0.26% when risk-adjusting a 60% share/40% cash portfolio that is rebalanced annually versus the same portfolio that is not rebalanced (and drifts instead).
4. Behavioural Coaching
Let’s be frank: investing evokes emotion. Advisers are there to help you maintain a long-term perspective and a disciplined approach. Don’t worry, having feelings isn’t a “rational or irrational investor” issue; it’s a human issue. It’s normal to be swayed by the opinions voiced by the ‘experts’—the talking heads or news headlines that often recommend change. But abandoning a well-planned investment strategy can be costly, and history shows some of the most significant challenges are behavioural when it comes to taking control of your money.We’ll help you stay on track.
Potential value-add: Vanguard research and other academic studies have concluded that behavioural coaching may add 1% to 2% in net return. This is numero uno for a good adviser.
5. Tax Planning
The allocation of assets between taxable and tax-advantaged accounts (like super) can add value each year that can compound through time. From a tax perspective, optimal portfolio construction also minimises the impact of taxes on your portfolio. Laws and regulations keep on changing too so it pays to have an adviser who can guide you in the right direction when it comes to reducing your tax bills.
Potential value-add: 0% to 0.75%, depending on the investor’s asset allocation and the breakdown of assets between taxable and tax-advantaged accounts.
6. Knowing When to Take Money Out
An increasing number of retiree clients are facing important decisions about how to spend from their portfolios. Complicating matters is the fact that many hold multiple account types, including super and trust accounts plus everyday savings. Advisers who implement informed withdrawal-order strategies can minimise the total taxes investors will pay throughout retirement, thereby increasing your wealth and the longevity of your portfolio. This process alone could make or break your retirement.
Potential value-add: Up to 1.10%, depending on the breakdown of assets between taxable and tax-advantaged accounts and your personal tax bracket.
7. Adopting a Total Return Investment Approach
With returns on bank deposits and cash at all-time lows, the value of advice has never been more critical for retirees. And the days of having a diversified share portfolio mixed with some income-generating investments are gone. If you wish to spend only the income generated by your portfolio, referred to as the “income-only” approach, you have three choices:
- You can spend less
- Reallocate to higher-yielding investments (which carry more risk)
- Spend from the total return on your portfolio.
The total return from your portfolio includes not only the income or yield but also capital growth. A good adviser can help you make the right choice here. We wrote an article recently discussing the importance of a Total Return Investment approach.
Potential value-add: Value is significant but too unique to quantify, based on each investor’s desired level of spending and portfolio composition.
Total Value Added:
About 3% in net returns for clients (depending on your individual circumstances of course).
Value, like many things in life, is in the eye of the beholder. For some investors without the time, willingness, or ability to confidently manage their finances, working with an adviser may bring additional peace of mind. The value of an adviser in this context is virtually impossible to quantify.
If you’d like to know how one of our qualified financial planning experts can add value to your financial position, then feel free to give us a call on 1300 242 700.