The value of an advisor: Why we believe it’s higher than ever
Russell Investments has always focused on the value of advisors. And never was an advisor’s value so obvious as during 2020.
It was a year that tested both investors and advisors in so many ways. Financial markets fell sharply early in the year, when the global spread of the COVID-19 virus forced a sudden shuttering of economic activity, only to recover strongly. Those investors who followed the advice of advisors and stayed in the market tended to fare well.
Most financial advisors had further challenges, as they had to switch to a virtual environment seemingly overnight. For many, harnessing the available technology was a steep learning curve.
That’s why we think it is the perfect time for you to place a sharper focus on the full value of your advice and communicate that value to your clients.
We’ve also reassessed the formula we use in our annual Value of an Advisor report to reflect the broadening role of a holistic financial advisor. Our new formula more closely reflects the tangible benefits of working with an advisor.
Let’s take a look at the full value equation of an advisor’s services. The data clearly shows that the value is much greater than the typical advisory fee.
A is for your active rebalancing philosophy
When markets are rising calmly, it can be easy to underestimate the importance of regular rebalancing. But in a rollercoaster year like 2020, active rebalancing of a portfolio may have helped create a smoother rider for investors.
Rebalancing can also help ensure true diversification is still in place. 2020 saw a few key technology names dominate U.S. returns over the year and substantially increase their weighting in the S&P 500® Index. Without regular rebalancing, a client’s portfolio could have become overly heavy in large capitalization U.S. equities, potentially creating an overweight of risk if that single asset class dropped.
For example, if an investor had purchased a hypothetical balanced portfolio of 60% equities and 40% fixed income in December 2005 and it had not been actively rebalanced since then, by the end of 2020, the risk profile of the portfolio would look very different. That original balanced portfolio would have become a growth portfolio, with 70% invested in equities and only 30% in fixed income. That would expose the investor to risk they didn’t agree to and could be a concern if equity markets suddenly reversed, as we saw in early 2020.
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For illustrative purposes only. Not intended to represent any actual investment. Source: Morningstar, Russell Investments. Analysis based on quarterly data from 12/31/2005 - 12/31/2020. Initial asset allocation: 20% S&P/TSX Composite Index (Canadian equity), 20% S&P 500 Index (US Equity), 20% MSCI EAFE Index (Foreign Equity), and 40% FTSE Canada Universe Bond Index (Fixed Income). Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.
B is for behavioral mistakes coming into focus
2020 was a wild ride. Many investors were tempted to run for the exit in mid-March, when the S&P/TSX Composite Index registered the largest weekly decline since 2008.
This is where the advisor’s behavioral guidance really comes into focus. Without that guidance, many investors could have sold low in March—in fact, $15.6 billion was pulled out of long-term funds in Canada in that month.1 Investors who remained invested saw the index rebound 19.2% in the following three days, and not just fully recover, but actually return 5.6% by the end of the year. Imagine the hit to a portfolio if an investor client missed out on just those three days.
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Source: Investment Funds Institute of Canada (IFIC), Russell Investments. As of December 31, 2020. Data shown is historical and not an indicator of future results. Long-term fund flows based on monthly IFIC data. Growth of $10,000 if invested in MSCI World Index on January 1, 2000 until December 31, 2020. Indexes are unmanaged and cannot be invested in directly. Past performance is not indicative of future results.
Markets can be unpredictable. But their long–term trend has been up. Remember that the S&P/TSX Composite Index has finished the year in positive territory 73% of the time since 1924.2 Investors who are guided by advisors—and stick to their plans—are likely to benefit.
We believe there is good value in an advisor’s hard-but-simple task of helping clients stick to their long-term financial plan.
C is for customized client experience
If someone wanted a cookie-cutter, one-size-fits-all investing experience—at very little cost—they could use a robo-advisor. Robo-advisors generally don’t provide a financial plan, ongoing service, or guidance. In most cases, they just give the investor the option of choosing from a pre-selected list of funds, provide annual statements and a phone number to call in case of questions.
Now consider this: A lot of advisors have historically anchored their value on investment management—on the skills they bring around asset allocation, security selection and portfolio construction. But, as we just shared, robos do this, too—and typically for a much lower (and on average, declining) fee. Is anchoring your value on the one part of your service model that risks becoming commoditized really the best strategic decision for your business? It will be hard to justify a 1% fee for something an investor can get elsewhere for much less in many cases.
We also recognize that an advisor’s role has changed in recent years. At one time, an advisor was essentially a broker—selecting investments for clients. Now, most advisors are expected to provide holistic wealth advice for entire families. Indeed according to a U.S. study, between 2017 and the end of 2020, there has been a 39% increase in advisors delivering comprehensive planning services.3 While Canadian data is not available, we believe a similar trend exists here.
We have found that the value that advisors deliver through the customized experience is much higher than the cost of an automated service and cookie-cutter plan from a robo-advisor.
P is for product alignment with goals
How can you provide a customized experience for each client? It seems there’s not enough hours in the day—or the year.
This is where the use of models can really help you free up time, while still ensuring each of your clients gets the customized client experience they value.
For example, you could choose a core investment strategy for all of your clients—the strategy in which you have the deepest conviction and the broadest knowledge. You could then outsource more specific strategies—such as small cap investments, or international investments, or high yield fixed income—and include a selection of those strategies in your client portfolios. Or, you could outsource the tax efficiency of the strategies to a firm that dedicates time and expertise to creating products that provide clients with the best possible tax profile.
The time you would have spent researching stocks, meeting portfolio managers and analysts, tracking those stocks, documenting trades and conducting ongoing research is now available for you to spend time with your clients—giving them the personalized experience they crave.
A recent U.S. study4 has found that by using model strategies, a financial advisor could save 7.7 hours a week. Multiply that by the number of weeks worked in a year and you end up with an extra 385 hours—time you could spend deepening your relationship with your biggest clients.
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Chart Source: https://static.twentyoverten.com/5e0f642709752828dbb0c6e0/-mjyNOiwG/Outsourcing-Money-Management-article4.pdf, AssetMark, 2019. Accessed on Feb 3, 2021. Assumptions: Advisor outsources 50–89% of Assets Under Management (AUM). Advisor works 50 weeks per year.
T is for tax-efficient investing
Why should we be concerned about tax management? Because taxes can have a significant impact on returns. As an advisor, you can play a strategic and significant role in helping investors minimize their tax bills while remaining on the right side of Revenue Canada. For example, helping high-income investors understand the benefits of corporate class for non-registered funds can help reduce their immediate tax burden. Deferring taxes to when their income may be lower—such as in retirement—can be
immensely valuable to many investors who are still in the saving years.
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For illustrative purposes only.
All examples shown are based on the following 2020 Ontario marginal tax rates for calculating the tax liabilities: interest income = 46.4%, Canadian eligible dividends = 29.5% and capital gains = 23.2%
A tax-efficient approach to investing can not only give your clients more money to work with and further invest. It can help differentiate your business.
As we emerge from the global pandemic, the next issue we may have to face is how to pay for the historic government stimulus packages that kept the economy afloat in 2020. That stimulus added more than $400 billion5 to our country’s total debt. With that in mind, it seems likely that taxes are only going to go up over time.
So don’t wait to get tax-smart. Now more than ever, using a tax-efficient approach can potentially provide significant value to your clients and help you stand out from your peers.
The bottom line: Communicate your value
What a year. On top of everything else 2020 threw at us, it put many investors’ life savings at stake. We’re grateful that advisors were on the frontlines, guiding investors through the many pitfalls. Our research makes us strongly believe that advisors have never been more valuable.
Advisors, stand tall. We believe in your value. We see your commitment. You’ve never mattered more.
1 Source: Investment Funds Institute of Canada (IFIC), Russell Investments
2 Source: Canadian Institute of Actuaries, BNY Mellon, Refinitiv DataStream, Russell Investments.
4 Source: https://static.twentyoverten.com/5e0f642709752828dbb0c6e0/-mjyNOiwG/Outsourcing-Money-Management-article4.pdf, AssetMark, 2019. Accessed on Feb 3, 2021
5 Source: Statistics Canada https://www150.statcan.gc.ca/t1/tbl1/en/cv.action?pid=3610047701