As far back as I can remember, there hasn’t been a time that the question of the value of financial advice hasn’t arisen, writes Trevor Philips, international financial adviser at Blacktower Cayman.
Don’t get me wrong, clients do appreciate the value advisers bring to their financial lives each year.
Our role greatly contributes to the outcomes in people’s personal lives in which the wealth acquired makes living possible.
But we also live in a time where the only constant is change. We have now an established D-I-Y culture in investing, which, when coupled with information access, it may be that individuals can opt to go it alone full time.
Also, financial media can give one a great sense of confidence that people can just listen to the news and know where and how to invest. Ergo, the question ‘Are financial advisors worth it?’
That is now a deciding question with an answer that depends on many factors.
Adjust to risk
The highly respected retirement researcher Wade Pfau said that good financial planning decisions extend well beyond where and how you invest.
He identified two major research efforts that have attempted to quantify how good financial decision-making can enhance one’s lifetime standard of living.
Pfau’s research identifies how good decision-making can enhance sustainable lifetime income on a risk-adjusted basis.
Consider retirement planning and calculating a client’s ability to spend in retirement more than they could have otherwise, and what can be interpreted as meaning that the assets earned a higher return net of taxes and fees to make that period of spending possible.
And on the point of catering for risk, what we are currently dealing with, concerning one of the the coronavirus’s multiple net effects, is that many personal financial plans have been already derailed.
Lack of wider views
Covid-19 has hit at the heart of what ultimately drives markets – not just confidence, but the human resource capital.
It’s a direct impact on people who can’t go out to work due to illness or quarantine.
A reduced labour force means lower production in manufacture and distribution, and ultimately consumption. That has tanked markets and consequently investment performance now, and likely in the near future.
Had D-I-Y investors factored in this kind of market risk and can their investments navigate the pitfalls over the short and medium term?
Unlikely so, and even if they had, could they access investment vehicles with the best cost/value efficiency – expense ratios?
Many investors are tacitly unaware of what they’re paying fees on mutual funds. Further, they likely don’t have the necessary quantum to negotiate fairer, more competitive terms as that of an adviser service.
Adding value
In the field of finance, the term ‘alpha’ identifies how a fund manager can combine securities into a portfolio that provides excess returns to investors above the appropriate related benchmark index for those investments on a risk-adjusted basis.
In simple terms, achieving alpha means earning more money than expected. In practice, it is very difficult to achieve alpha from market timing and security selection, which explains the rise of indexing.
In this way, investing is basically commoditised nowadays. Financial advisers who only focus on selecting investments will really struggle to add value.
Without a doubt, there is immense value in comprehensive financial planning and good financial decision-making. It’s important to remember, and easy to forget, that the end goal of comprehensive financial planning goes beyond choosing investments.
Be ready
Much has been said about the effect of this global pandemic, but by the time it evens out and we’ve had time to let it all sink in, one of the issues that stands out is financial preparedness at the personal level.
We’re still in the midst of the outbreak and what’s apparent – or should be – is that there are many people out there who aren’t truly financially independent and, therefore, must now rely on state help.
Ideally, that shouldn’t be and sadly there are far too many experienced, qualified professionals in the workplace who don’t have a comprehensive financial plan that provided for emergency short- to medium-term savings for times as these.
This raises obvious questions about individual savings, their retirement futures, and the quality of financial advice taken in the past, that now shows, and the quality of advice that will have a bearing on future outcomes.
Plan for the worst
Is there an emergency fund in place to carry us through times as these? Are our savings levels sufficient? Is an amount of money set aside in case an unexpected financial emergency arises – usually three to six months’ salary in savings?
Establishing and maintaining an emergency fund might be challenging to begin with, but being able to use this money when faced with unforeseen circumstances can significantly reduce financial stress.
Just having this money easily accessible can go some way to help people feel more financially prepared, and avoiding the temptation of credit cards and loans or other state bailouts.
The measures being taken by governments around the world for individual help, point to volatility at the personal level. That the state has had to step in shows that financial plans, where they existed, have likely failed to kick in gear when most needed.
Or worse, there has been no plan at all.
Employers could learn too
Employers too, have been somewhat exposed for their flat-footedness in helping employees by raising awareness and communicating the importance of having a fund like this, had they take up the invitation to work with finical advisory service firms to set up an in-house wellbeing initiative programme.
The question is: are employers now prepared to entertain the idea of introducing a new wellbeing initiative as part of corporate responsibility?
I would expect that individuals can only do so much with what they earn and we do understand. But a case can be made for employers to step in and do that what can be done to change the culture within the workplace.
The ‘new normal’
For the lone investor, the value of professional advice is to work with you to guide you through the maze of risks which the untrained financial planner may not easily recognise and cater for in their risk planning.
It is certain that with the gains lost from 2019, most will have some catching up to do to get back on track. But it won’t be as simple as getting on board with new investment schemes.
It’s likely that existing financial plans would have to be restructured and timelines adjusted and costs for same calculated to make space for more savings years, or moves to maximise protection of savings depending on how loose you are to your goal.
Questions on tax will also need to be answered, as investments will need to be found to cover those costs as well. This is the help customers need now amid the crisis with the global pandemic.
For employers, an employer initiated and sponsored wellbeing program is invaluable to employee retention. The signal that you care about their welfare would not be lost in the disruption that the coronavirus has presented.
That is the value of advice that both the individual and corporate can rely on when disruption might be the new normal.
This article was written for International Adviser by Trevor Philips, international financial adviser at Blacktower Cayman
