Do financial advisers add any value?

Trying to work out how much value an investment adviser adds to the investment process is difficult, but Vanguard has had a go at quantifying it anyway.  Vanguard’s conclusion is that there are seven key areas adding to around 3% per annum (intermittently rather than every year) that could be added by an adviser (see here for full report).

Vanguard shied away from most of the investment side – understandably as it is difficult to make generalisations.

Most of the gains Vanguard saw were from either tax structuring (V and VI in the list below) or from fixing common investor behavioural biases (III, IV and VII). And this ties with what I see as the core strengths of most good financial planners: (a) to structure assets in a tax effective manner and (b) to act as a guide/mentor/psychologist for investors – explaining complexities, steering investors clear of the worst investments and talking investors out of succumbing to greed or fear.

Adviser value

Source: Vanguard

Asset Allocation:

Vanguard understandably cop out of having a number on Asset Allocation and just say that an adviser’s impact is greater than zero.

Most of the research agrees asset allocation is the most important decision an investor has to make for investment returns. The issue that Vanguard missed, in my opinion, is that there are two different types of asset allocation: strategic or tactical.

Strategic asset allocation is structuring an investor’s assets to match their risk profile, whereas Tactical asset allocation is the practice of switching out of overvalued asset classes into undervalued asset classes.

Strategic asset allocation can be done by most financial planners (including online robo-advisers), and most financial planning companies have extensive systems to make sure that clients don’t end up in the wrong asset classes.

Tactical is more difficult. While there are some financial planners who can do tactical asset allocation, my view is that you are more likely to get a good result using an investment manager who has a full-time job doing asset allocation rather than a planner doing it part time while managing a full book of clients.

Tax structuring

The estimates are based on US tax issues, but the same applies in Australia. If you take into account pension eligibility and superannuation, you will probably find the impact to be greater in Australia.

Many accountants can perform this role as well. You probably shouldn’t be doing this part yourself.

Investor Biases

There are three parts to this: rebalancing assets back to target weights (reducing the risk of the portfolio), investor behaviour (preventing investors from succumbing to greed at the top of the market or fear at the bottom) and total return investing (not getting hung up on yield).

These are all things that investors can potentially do themselves. But most investors will do it badly. I blogged recently about the Nervous Investor:

The main factor is investor behaviour. When markets wobble, investors tend to sell or sit on their cash. When markets have been performing well, investors tend to invest their cash.

From a risk perspective, this might seem reasonable to the Nervous Investor – buy when risks seem low and sell when risks seem high.

But, from a return perspective, it is exactly the wrong strategy: buy high, and then sell low.

Your brain is actively working against you

What is clear from the studies is that the average investor in the heat of the moment makes poor investment decisions.

The media doesn’t help – they generally only report two things: (1) the markets are up a lot and you should have bought last week, get in quick before you miss out (2) the markets are down a lot and you should have sold last week, sell now before you lose the lot

Getting perspective is difficult, especially if you rely on newspapers, financial TV or stock brokers. The first two are in the entertainment business and so creating an exciting story trumps any obligation to give you a realistic perspective. Stockbrokers are in the business of making money from turnover, so convincing you to buy one day and sell a few weeks later trumps any obligation to give you long-term advice.

Some investors will be able to overcome these inherent biases and do it themselves. Most investors can’t.

Investors used to have three options to overcome the inherent biases:

  1. Do it yourself.  This may seem like the cheapest option but can easily wind up being the most expensive option.
  2. Use a planner.  The most expensive option, useful for people who want high service and someone to call and talk to about issues
  3. Use a robo-advisor.  Much cheaper than a planner, but you only get strategic asset allocation.

Warning: Shameless self-promotion. We started the MB Fund to add a fourth option – costs that are much closer to robo-advice than planning, including tactical asset allocation as well as strategic, offering full transparency and frequently blogging to fill the information gap.


Damien Klassen is Head of Investments at the Macrobusiness Fund, which is powered by Nucleus Wealth.

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Integrity Private Wealth Pty Ltd, AFSL 436298.

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  1. Hmmm sort of depends on who you ask:
    Ever asked an hedge fund BSD if they really add value?
    Hint: they didn’t get to be where they are because they were big on introspection.

  2. The biggest mistake the participants in this sector have made was to consider themselves advisers – in particular the big banks but it applies to any integrated provider. If you are going to someone who is owned or aligned with a manufacturer, then you are talking to salespeople. You may get appropriate advice from a tax perspective (if it effects every provider equally) but you will only accidentally get the best product in this situation if you haven’t done any research.
    Both buyers and sellers in this market need to recognise this. While it is not a perfect analogy – you don’t go to a Ford dealership to buy a Holden, and at least the greasy guys on the Holden forecourt have the honesty not to call themselves advisers.

  3. Some value but only if you have a minimum amount of assets.

    They way the RC is going, only the wealthy will be able to get financial advice going forward.

  4. What the gov needs to do is bring in standardized performance reporting, hence irrespective if your a fund mger or adviser, clients can tell that after all costs, bonuses etc are excluded, this is your result relative to a locked risk profile, advisers will do anything to make out they add value, by say calling a balanced portfolio, one that has a 75% equity weighting, or including hybrids as fixed income?
    Over my years on a scale of 1-10 in terms of knowledge etc, the average client would be a 3, and average adviser a 5 yet without the relativity, the client thinks they are wonderful, and very much value adding, which a judge would call complete bullsht in a court of law.

      • Almost impossible, remember tax structuring is a one offf, hence pay an accountant by the hr to lock this in, then keen say 3 yrs cashflow in cash/fi, then put the rest in an international fund. Done.

  5. Financial advisers: conflicted, self-serving and financially illiterate. They are schooled in a single dimension: buy equities and property while younger …. transition out of equities into bonds near retirement, without ever understanding the true risks / complexities in finance.

  6. My mother is 82, retired, and I had a look at her investments as allocated by her financial advisor.
    About 35% of her funds are being lent to property developers. The return is about 6-7%. He charges about $150 per week to manage her portfolio.
    She doesn’t trust me because I am not a trained investor. I told her she is taking a huge risk and would be much better off in a run off fund. She said her money is safe because he advisor said so.

    • Very common, l was once told the key is to confuse the client, then the client will just make their decision based on ‘do l trust them’, then the clients basically fked.