In a year that tested investors, “never was an advisor’s value so obvious,” says the 2021 Value of an Advisor Study from Russell Investments Canada Ltd.
The study — now in its sixth year — examined the advisor’s role against the backdrop of market activity, returns and fund flows in 2020. The end goal was calculating how much value an advisor added for clients using a formula that took into account both their services and fees.
For the past year, the study said, advisors added value of 3.95%, with behavioural coaching efforts adding the most at 2%. The total value is up from 2.88% in 2020 and 2.79% in 2019.
One factor that could have affected the value was the firm’s decision to reassess its formula, to “better reflect the changing role of a financial advisor.”
In previous years, the three main categories measured were annual rebalancing of investment portfolios, correcting behavioural mistakes and tax-efficient investing, with fees also assessed. Now, the formula also looks at advisors’ customized planning and their efforts to align products with clients’ goals, taking “a closer look at that broadened role.”
The study arrived at its 3.95% figure for 2020 by combining the following figures: four basis points for active portfolio rebalancing; 200 basis points for behavioural coaching; 66 basis points for tax-efficient planning; 63 basis points for offering a customized client experience; and 62 basis points for assessing goals and preferences when choosing products.
“Given the volatility seen in 2020, it’s no surprise that the biggest contributor to advisor value is your role as a behavioural coach,” the study said. “In fact, this category on its own more than offsets the 1% fee advisors typically charge for their services.”
In the client coaching section, the study showed how missing just the 10 best market days within the 10-year period ended Dec. 31, 2020, could have hurt clients’ portfolios. For example, for an initial investment of $100,000 that was made at the start of that period, nearly $70,000 of possible returns could have been missed if investors chose to jump ship at the wrong times.
As such, “Investors who are guided by advisors — and stick to their plans — are likely to benefit,” the study said, adding that markets are up in the long term despite recent upheaval.
About offering customized planning and product alignment, the two new parts of the formula, the study said that advisors are now expected to offer holistic advice if they want to compete with ever-evolving robo-services.
Satisfying investors in these two areas generally means showing you can offer a wide variety of qualitative offerings, such as “a deep understanding of their individual circumstances and financial goals” as well as efficient use of actively managed multi-asset portfolios that can be catered to each client.
Read the full study.