I think the days of days of advice-only advisers are beginning, and more traditional advice-and-implementation advisers are on the decline.
Let me explain.
Most financial advisers aren’t just advisers.
Sure, we think about them in terms of advice. But another part of what they do is implement the advice they give, on behalf of clients.
It’s valuable to distinguish the service of providing advice from the service of implementing the advice. Because they are different, and I think one of those services provides a lot more value to clients than the other.
One of the biggest points of differentiation between my business Fairhaven Wealth and most other financial advisers is that I operate an advice-only business model. With the possible exception of Martin Hawes, I’m not aware of anyone else in New Zealand who operates this way.
I’m an adviser, plain and simple.
I don’t implement advice on behalf of clients. Clients can take or leave my advice. I let them keep control of their financial affairs.
It’s like when I practiced as a lawyer and provided legal advice. In most cases, my role was to be an adviser, and let people know the law as it applied to them. I could be as persuasive as I could be, but it was ultimately for my clients to decide what to do, informed by my advice.
This blog is made possible by my business:
independent, fixed-fee, advice-only financial planning services
Why I’m advice-only
I’ll be frank: one of the reasons I’m an advice-only adviser is because I don’t like dealing with all of the paperwork and compliance (ie, AML/CFT) involved with implementation.
But this is only a superficial reason. (Although the corollary of not having to deal with all of this paperwork and compliance is that I don’t need to spend as much time providing my services, and can charge more affordable fees than other advisers.)
The most important reason I provide advice only is because I think advice is where the real value is. Clients are usually capable of making investments themselves. By getting involved with implementing, I’m really just adding myself as a middleman, and adding very little benefit for doing this.
Think of it this way. Harry Sit of The Finance Buff blog uses the analogy of a doctor. The value your doctor (say, your GP) provides is usually when he or she makes a diagnosis and gives you a prescription.
Your GP doesn’t insist on going to the pharmacy to make sure you fill out the prescription, or follow you home to make sure you take your medicine. This isn’t where they add value to you. And seeing a doctor who operated this way would be really expensive.
It’s kind of the same way with getting a financial adviser to implement advice for you. Implementation is not, to my mind, where the value is. And it results in the service being much more expensive than it needs to be.
A disadvantage of being advice-only
There are some arguments for getting financial advisers to help you with implementing the advice. One of the strongest arguments is that it’s one thing to help you with developing a financial plan. It’s another to make sure you follow your plan.
Dealing with money is like a lot of important things in life: it can be simple, but not easy.
If an adviser has been inserted between you and your money – because you need to involve them if you want to access your funds or change your investments – you are adding a layer of friction that can help you stick to your plans, especially when you’re being influenced by emotion.
This is especially the case during market upheavals, where the temptation is to sell low after buying high. An adviser might be able to provide the sound counsel to play the long game, and continue investing exactly as you have been. They might be able to remind you that your plan relates to your circumstances, needs, and objectives, and not the short-term ups and downs of the market. And they will be able to remind you what they will (hopefully) have been telling you all along – that investments go up and down.
I think in some cases having an adviser looking over your shoulder can be valuable. And if there’s anything that could change my mind on this, it would be this. In many ways, I believe a good adviser doesn’t necessarily help clients to win, but stops them from losing.
But really, I think this perspective is patronising. I have more respect for my clients.
Most people are very capable, and are capable of investing in managed funds and the like without a third party holding their hand.
Why might advisers confound advice and implementation?
For clients, advice is where the value is.
But for advisers, there are few commercially sound reasons for implementing advice.
One, is that it makes it easier to lock clients in. If you’re just an adviser, a client can walk away without any difficulty. If you’ve implemented the advice, it’s harder for the client to walk away. They are stickier.
It’s also easier to extract fees via implementation.
Most investment advisers charge clients fees that are calculated as a percentage of funds under advice. If they charge 1% up to $500,000 and 0.8% up to $1,000,000, for example, you might be charged $2,000 per year if you have an investment portfolio of $200,000; $4,000 for a portfolio of $400,000; $5,800 for $600,000; and $7,400 for $800,000. By the time the portfolio gets to $1 million, fees are $9,000 per year.
When you look at the fees from a dollar value, they’re pretty high. It’s probably more than you spend on other professionals, such as your accountant, your lawyer, and your dentist, in any given year.
However, when these fees are automatically deducted from your assets, and are reported at the same time as you see the returns you’ve generated and the product fees you’ve charged, most clients are kind of anaesthetised in relation to this figure.
As an advice-only adviser, I have to invoice clients directly. A client will think twice when you invoice them directly and they have to transfer the money directly to you.
Add to this, that the client with the $200,000 portfolio is to a large extent receiving a similar service to the client with the $1 million portfolio, but is paying only a fraction of what the more wealthy client is paying. I understand why we have regressive taxes, but this is something else.
(This relates to another point that distinguishes Fairhaven Wealth from other financial advisers, even “fee-based” advisers. I charge set fees negotiated up-front. These are usually fixed fees. I don’t charge fees as a percentage of funds under advice.)
Using a financial adviser to implement their advice results in additional costs
One of my driving investment philosophies is that there are a lot of things you can’t control. But there is one thing you can control – and that is fees. As a general rule, you want to pay as few fees as possible.
Generally, an adviser who provides investment advice recommends that a client put their funds into a wrap or platform such as Aegis or FNZ (which are, in simple terms, kinds of trusts. I’ll refer to them as “platforms” from here). This platform holds client money, and investments are made through the platform by the adviser on behalf of the client, at the instructions of the client.
Using a platform makes it easier for the adviser to provide ongoing services to clients. Having a centralised reporting system and a simple process for actioning transactions enables advisers to more efficiently serve many clients.
There are instances where clients may be able to access investments that they wouldn’t otherwise be able to access them. And using a platform can simplify things from a reporting and tax perspective for clients.
But to a large degree, platforms benefit the adviser more than the client.
And of course, platforms aren’t free. While it’s true the adviser isn’t receiving any of these fees, it’s also true that you’re paying fees that you might not have needed to pay, if you’d invested yourself.
Even if the fee is, say, 0.2% or 0.3%, that’s $1,000 to $1,500 per year on a $500,000 portfolio. The adviser may not get it, but to a large extent, it’s a cost of using an adviser who also implements their advice.
Most people can’t use one of these platforms unless they are associated with an adviser. In most cases, there are other valid investment options that don’t involve using a platform.
So there you have it! Some reasons why I’m an advice-only financial adviser, and leave it to clients to implement my advice (or not!) on their own behalf.
I care about providing high quality financial advice. I care about aligning my interests with clients to the maximum extent possible to ensure there’s nothing stopping me from providing the best quality financial advice.
I also care about having clients who are engaged in their financial futures. There are definitely people out there for whom an adviser who provides an implementation service is appropriate. But in my opinion, there are many more who would simply benefit from receiving affordable, clear advice about their situation.
I don’t have a crystal ball, but I see many advisers providing fixed-fee, advice-only services in the future. And while I don’t see advisers giving up on implementing advice anytime soon, I think it will decline in the coming years.
If you’re interested in engaging an advice-only financial adviser, check out my services at www.fairhavenwealth.co.nz.
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