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Showing value for advice number one issue

Advisers aren’t worried that a move away from commission could make clients less comfortable with paying for advice.

Thursday, August 15th 2013, 7:20AM 10 Comments

by Susan Edmunds

A British survey has shown that in that country, a third of investors who had paid for advice in the past five years would not do so again.

Britain has new rules that mean financial advisers must declare their charges explicitly, rather than receiving commission from product providers.

Research firm GfK found one in three of the more than 60% of people who had used an investment adviser in the past would not now seek advice in future, opting instead for the DIY approach.

Matt Phillips, of Top Half Financial Services, said advisers needed to think about whether their clients perceived that they were getting value. “If they aren’t seeing value, why pay for it?”

He said commission and incentives could cloud advisers’ judgements but until everyone was forced to shift to fees from commissions, there was a fear that those who did would lose their business to those seen as offering advice “free”.

Institute of Financial Advisers president Nigel Tate said few people would have the knowledge or skill to manage their own investments.  “While the markets are as they are at present most people could make money, but what happens when we have the inevitable decline in the future, who do they feel would have the better position: A professional adviser that has covered all of his or her obligations in the New Zealand code, or themselves with no knowledge or skills in asset selection or management?”

He said many investment advisers were already forgoing commissions in favour of fees for clients. “There is a lot more done for the fees than simply sitting and watching the investment… New Zealanders are renowned for being great DIY-ers but from a financial perspective, I feel that so many were burned in the finance company collapses that they are now both more gun shy and far more aware of the value of good advice.”

PAA general manager Jenny Campbell said most people were comfortable with how advisers were paid and did not expect anyone to work for nothing.  “As long as it is really clear who is paying whom and how much, then this doesn’t seem to be much of an issue.”

But she said some people still took a DIY mentality to their financial planning. “Most of the money lost through dodgy finance companies post-GFC was actually through direct investments with those companies.”

She said showing people the value of good advice was the number one challenge for the industry. “We don’t hesitate to go to accountants or lawyers but are still reluctant or unsure what an adviser can offer.”

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Comments from our readers

On 15 August 2013 at 9:46 am Independent Observer said:
This British survey is not about fees v commissions, it’s about value. How the client is charged is up to the adviser & their client… as long as there is full transparency.

Consumers will only pay advisers (or anyone for that matter) a premium if they believe that they are getting value for money. The question that industry participants should ask themselves is whether they are providing a service that is difficult for the client to replicate themselves. Simply drawing up an initial financial / investment plan, or providing the mediocrity of an index exposure, and then clipping the ticket is unlikely to present a value proposition to attract & retain clients.

Interestingly, the Australian industry is experiencing mass outflows from consumers opting to DIY (check out the growth of SMSFs). This reflects consumers “voting with their feet” and walking away from an industry that failed to meet expectations through the GFC (ie: relying extensively on the nonsense of MPT & correlations that has been the foundation of investment planning for since 56), and has been found lacking in transparency by the Regulators.
On 15 August 2013 at 2:54 pm David Whyte said:
Wise words I.O. - good points, well made. SMSFs were as much victims of the outmoded practices to which you refer when the GFC hit, and I suspect that smart financial planners have presented themselves as (re-engineered) trusted advisers to these DIY funds. Certainly, my SMSF was severely impacted by the asset allocation strategy recommended by the financial planner based on supposedly reliable Industry Research. However, I'd say that SMSFs are now very much part of the industry, and while there has been a huge upsurge in SMSF numbers, investment strategy is largely still driven by financial advisers. So if consumers are voting with their feet, they're walking to a different room in the same house.
On 15 August 2013 at 11:10 pm Collin Nefdt said:
What happened during thr GFC is the reality of long-term investing and equity markets and investors that cannot accept that equity markets can experience severe declines are likely to be much worse off with products that smooth returns or guarantee capital only or self-managed TAA. That fact that the GFC hurt portfolios has absolutely nothing to do with financial advice in my opinion and everything to do with unrealistic expectations about how markets and investing actually work.
On 16 August 2013 at 8:31 am Independent Observer said:
The issue with the GFC (and since 1987) is that asset classes are no longer correlated... ie: everything got hit during the GFC, demonstrating the failure of diversification
On 16 August 2013 at 9:24 am murray weatherston said:
Dear IO

Did you mean to say uncorrelated?
On 16 August 2013 at 10:54 am Dr Mike Naylor said:
The financial advice industry in NZ needs to carefully distinguish between what it can offer as overall 'financial advisers' or 'financial life coaches', which is a lot, and what it can offer as narrow 'investment advisers', which is not as much. After the average Joe or Joeline had been told 'put x% in cash and the rest in a broad low cost index fund' what else do you have to offer?

As an academic who teaches investments at times I have to say that currently research don't have a lot more to offer. After all we have always said - 'differing asset classes have low correlations, most of the time'. This is still true - the GFC was the exception. The markets can be expected to go back to being 'well-behaved' - until the next crisis. By definition that next crisis will occur in a way which is unexpected and hard to prevent. It has been well-known from many prior crises that correlations differ during crises. There has been a LOT of good research on this since 2008, just no consensus. The new ideas are quite complex and have not yet been distilled down to teachable but useful models (at least for those who don't have an MSc in maths).

I have little faith in DIY approaches, as most clients will not have the personal financial skills to make wise choices - after all most investors who lost in finance companies were DIYs. 90% of the population need help.

Murray - the correct word is 'low correlation' as no or negative is uncommon. And if the market as a whole drops then everything can drop.
On 16 August 2013 at 4:16 pm Independent Observer said:
Well spotted Murray: Uncorrelated

Oops
On 16 August 2013 at 4:27 pm Indepdendent Observer said:
Dr Naylor: Try this as an interesting exercise: run correlations between equities, bonds & cash (you can do other asset classes of course), and see what occurs from 1987 onwards. I have seen evidence using the S&P500, US Bonds, & US T-Bills dating back since 1926, demonstrating that the correlation argument has collapsed since 87.

Otherwise - I tend to agree with your observations
On 17 August 2013 at 1:00 am Kimble said:
What is the correlation argument? I ask because too often we see someone saying that XYZ has been proven wrong, only to have their description of XYZ match an argument that absolutely nobody has ever made.

During the GFC, risk aversion spiked, so no surprise that it might affect the value of many risky assets in a similar way. You can diversify to avoid the specific risks of the asset classes. You cant diversify away the risk that affects all of them.

No matter how many times people are told what diversification is and isnt, I dont think it will ever really sink in. Flash forward to a probable conversation in the not too distant future...

"Its not the fault of diversification that your portfolio didnt survive the zombie apocalypse."
On 17 August 2013 at 12:31 pm Dr Mike Naylor said:
IO - I have done that correlation repeatedly with students. I tend to include international asset sets though, as there used to be good gain from international diversification. And I agree - the main trend there has been a startling increase in correlations since 1987, so less gain from holding international assets. With the rise of globalisation you have to be careful what assets you hold as the cash flow of many US firms are now global, and the prices of many US bonds are based on non-US demand. So yes, while the diversification argument still holds - we now have to do analysis of quite complex sets of assets to get respectable diversification.
My point was crisis vs non-crisis correlation. This was impressed upon me by the 1997 Asian crisis, when the correlation btw the stock markets of SE Asian countries temporarily went from 0.2 to 0.95 - due to Americans withdrawing funds from everywhere in a panic. The same occurred in the GFC where even off-the-run US treasuries where dumped!
Given that the rise of Asia means we are going through one of those one-in-five-centuries global changes and thus global markets will be more unstable in the future, advisers are going to have to be very careful about what they tell clients about expected returns.
As I said - life is becoming very difficult for investment advisers. So in terms of a 'value for money' proposition it's easier to offer advice around helping clients achieve their financial aims.

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