A is for Appropriate Asset Allocation

There is significant research that suggests that asset allocation drives over 85% of the investment outcome for an individual¹. However there can be risks for engaged investors who build their own portfolios. Without the guidance of an adviser, investors could be making a fatal flaw in their portfolio design when it comes to setting an appropriate asset allocation to meet their investment objectives and needs. Investors may not set the right investment strategy for their circumstances and they may lack the knowledge and/or time to research the many investment options available. There is also the added temptation to chase performance and overreact to market events.

We believe advisers have the potential to add significant value to an individual's portfolio over the long term by helping clients to work through their values, preferences and motivations from the outset. For investors who elect to proceed without advice, there can be a big price to pay for selecting the wrong asset allocation.

¹ Russell Investments Making Super Personal White Paper 2020

B is for Behavioural coaching

There is no question that 2020 was a wild ride. Many investors were tempted to flee for the exit in mid-March 2020 when the S&P/ASX 300 fell by 36.2%.

This is where the value from an adviser's behavioural guidance really comes into focus. Those that stayed invested throughout the volatility not only recovered loses, but also added gains.

As the following graph shows, missing out on even a few days of good performance can have a detrimental effect on a portfolio. And how do you know which days those will be? That’s the catch—you don’t. Markets can be unpredictable. But their long term trend has been up. Investors who are guided by advisers and stick to their plans are likely to benefit. Doing nothing can often be the better choice.

The investment impact of missing market days

10 years ended 30 June, 2021

Source: Morningstar. Returns based on S&P/ASX 300, for 10-year period ending June 30, 2021. For illustrative purposes only. Index returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Indexes are unmanaged and cannot be invested in directly.

C is for Cash optimisation

An investor’s attitude to cash can often be an interesting insight not only in their investment preferences but also their investing confidence. Between March 2020 to March 2021, we saw cash in banks increase by 12%, accounting for an additional $124 billion in additional cash².

What’s concerning is not just the amount of excess cash that is being held, but the real cost of this cash hoarding by investors. In our current context of an extended low interest environment and inflation concerns, this means that while cash seems safe, it can be a negative investment.

Advisers have an opportunity to help clients understand that while cash may be attractive, the cost of inflation could be eating into their wealth. In addition, advisers can help keep the portfolio invested where appropriate, to grow assets for future spending needs and finding the best source and process for accessing capital on behalf of their clients when required.

² Source: Australian Prudential Regulation Authority (APRA)

P is for Expertise

A common misconception is that financial advisers are purely investment managers, whose only job is to select investments and achieve a certain level of return. Good financial advice goes far beyond this.

The expertise of a financial adviser includes technical skills to assist clients in navigating the investment, legal, tax, superannuation and insurance requirements of a client. However, advisers also incorporate the important skills of effective communication, client understanding, behavioural awareness and overall efficiencies.

We believe the technical expertise, client engagement and overall efficiency are key elements of the value an adviser delivers. However, the most important benefit to a client is the feeling of confidence in their future and peace of mind.

³ ASIC financial advice: What consumers really think report 2019

T is for Tax-effective investing and planning

Tax is often considered the realm of the accounting profession. However, an adviser can also provide expertise on managing and optimising investment tax for their clients. The concept of investment tax isn’t just limited to what goes into a tax return. It can have an impact on the asset value or portfolio return, even though it may not always be seen. As a result, it can be difficult for investors to know how to be tax-effective in their portfolios.

Advisers can assist in the management and optimisation of investment tax in a number of ways, including structural tax strategies, managing client driven trading and making portfolio recommendations that is tax-efficient for clients.

Tax effective strategies

Communicate adviser value

This post-pandemic world could be the perfect time for advisers to reassess the full value they deliver and how they communicate that value to their clients.

We know that many advisers worked hard through 2020’s challenges to keep in touch with clients and keep them invested. Our formula shows that even if advisers were only able to help their clients avoid the behavioural mistakes that many investors make in the face of the significant volatility we saw, advisers have already provided value above and beyond their fee. Add to that their other services, customised client experience advisers give clients, ensuring their portfolios align with their specific goals, and the savings from a tax-effective approach, and it seems clear that the value advisers deliver is significant.

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