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

25 May 2016

reading time:  minutes

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. 


Tags


About the author 

Sonnie Bailey

Sonnie provides financial planning services via his business, Fairhaven Wealth (www.fairhavenwealth.co.nz). Fairhaven Wealth provides independent, advice-only, fixed-fee financial planning services. Sonnie is also a “recovering lawyer”: he has specialised in financial services, trusts, and estate planning.

You may also like

What does financial security mean to you?
Shades of right – avoiding black & white thinking and “musturbation” when it comes to your finances
The story of your life has many chapters
Financial planners provide four distinct services. A lot of Kiwis don’t need them all.