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 an Authorised Financial Adviser (AFA) and former lawyer with experience in the financial services and trustee industries. Sonnie operates Fairhaven Wealth (www.fairhavenwealth.co.nz).