Interestingly, that value is not just in selecting winning investments for clients. Contrary to popular perceptions of the industry, Russell believes the value of good advice goes “beyond investment management”.
Instead, a full 2.2 per cent of the 5.2 per cent expected to be gained from advice comes from helping investors not make stupid decisions — for example, joining the global panic selling that accompanied the onset of the coronavirus pandemic.
“For someone with an investment balance of $250,000, selling to cash on
March 16 would have locked in losses of more than $50,000 versus a member with the same balance who stayed invested during the volatility, recovering almost $20,000 already by the end of May,” the report stated.
Financial advisers were among the most vocal voices calling for calm and warning investors not to rapidly sell off stocks at the dawn of the bear market in March, both privately in conversations with clients and publicly in interviews with The Australian Financial Review.
The second biggest contributor was advice that maximises tax efficiencies when investing, expected to add 1.5 per cent per annum to client balances.
The gain is generating by advisers recommending tax strategies such as salary sacrifice to top up superannuation and choosing managed funds based on their individual tax implications for an investor.
‘Cost of cash’
The mix of different investment types or “asset allocation” accounts for 0.9 per cent, Russell estimates. That is based on an all-too-common scenario where an investor is in the wrong super fund option for their personal circumstances.
“In this case, if a younger investor had invested conservatively
instead of in the growth option, they would have missed out on
an average of 0.9 per cent return every year for 20 years,” the report explained.
“On $100,000 invested, that’s a significant difference of over $85,000 to the final return.” That would make quite the difference come retirement.
And finally, 0.6 per cent was attributed to the “cost of cash”. While many investors choose to allocate money to savings as a defensive mechanism against the ups and downs of markets, there can also be a missed opportunity cost of deploying too much to cash, especially with interest rates so low.
Investment professionals call this “cash drag” and Russell reckons a good adviser should be able to construct a portfolio to avoid it and add value to the client’s overall position.
The findings are at odds with criticisms of the financial advice industry as self-interested or even dangerous. And partly those perceptions have some merit.
As Financial Review columnist Jennifer Hewett (a self-confessed victim of bad financial advice), puts it:
“The royal commission is the latest instalment in this painful voyage of discovery for hundreds of thousands of Australians who wrongly believed that getting financial advice would actually help them
“Sometimes, that assistance can be real because there are many good, ethical financial advisers. But for a significant minority, advice does far more financial harm than good.”
But while the bad eggs in the industry have stolen the headlines for some time, the pandemic has seen that ethical majority come to the fore, helping their clients steer through the first recession in decades.
The ASX study found that 68 per cent of advised investors made changes to their portfolio as a result of COVID — and contrary to the herd that was frantically selling shares at that time, most were advised to buy up.
Of those, 41 per cent said their adviser had been “extremely” or “very helpful” in managing the impact of the downturn. As a result, 17 per cent of non-advised investors now say they’re open to it.
Paying for professional advice, however, is a whole other problem. According to research house Adviser Ratings, the median fees charged by advisers increased by almost 12 per cent to $2800 per client per annum in the 2019 calendar year.
It has likely risen again since and the federal government is in the process of hatching some kind of secret plan to reduce the costs to the consumer.
But if the Russell Investments analysis is anything to go by, it’s a cost that might be well spent.