How financial advisers can add value to their clients – “Adviser’s alpha”

One of the articles that has profoundly influenced my view on the value of financial advice is a paper titled “Advisor’s alpha”, written by Donald G. Bennyhoff and Francis M. Kinniry Jr of Vanguard research.

There is a tendency, especially among clients of financial advisers, to believe that financial advice is about helping clients maximise investment returns and outperform the market. To the extent this is even possible, my view is that this conflates the roles of financial advice and investment management. (Yes, they are very different things: one involves working with clients and one involves sitting in front of a Bloomberg terminal.)

Instead, a financial adviser’s value shouldn’t be measured against market returns. It’s about comparing financial outcomes clients might have achieved on their own, compared to outcomes that they achieve with advice.

In the article, Bennyhoff and Kinniry explain that “A financial advisor has a greater probability of adding value… through relationship-oriented services, such as

  • providing cogent wealth management and financial planning strategies,
  • discipline, and
  • guidance

rather than by attempting to outperform the market.” (bullet points and emphasis added).

I think emphasising the importance of an adviser’s soft skills, including as a behavioural coach – someone who can provide “discipline and reason to clients who are often undisciplined and emotional” – is vital. It’s often underrated or even ignored.

Helping clients with the soft stuff – whether it be helping them to articulate their objectives and provide clarity about their situation; or managing the risks to which they’re exposed; or keeping them accountable and focussed on their goals – is where a substantial part of the value lies. 

Sonnie Bailey

Sonnie is the founder and principal of Fairhaven Wealth.

Before founding Fairhaven Wealth, Sonnie worked in the legal and financial services industries for over a decade.

Sonnie first became involved with financial advice as a specialist financial services lawyer. For many years, he was an “adviser of advisers”, reviewing thousands of advice files prepared by hundreds of financial advisers, and providing feedback in relation to the quality and appropriateness of advice; industry best practice; risk management; and regulatory compliance. He has published work in industry publications and spoken at various financial advice conferences.

Sonnie has also worked with banks, investment management firms, insurers, and derivatives providers.

Sonnie has worked as a private client lawyer, focusing on succession, estate planning and trusts. He ran his own legal firm in Australia before relocating to New Zealand. He has also acted in independent trustee and company director positions.

Sonnie is passionate about helping people achieve their goals and manage the risks to which they are exposed.

He has written extensively on his blog, New Zealand Wealth and Risk, which can be found at www.wealthandrisk.nz.

Sonnie is married to his wonderful wife Chrissy, and has two young children, Ben and Anna.