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Russell Investments Canada’s 2019 Value of an Advisor Study suggests that a trusted advisor adds 2.79 per cent to an investor’s portfolio this year, which ‘materially exceeds the 1 [per cent] fee [advisors] typically charge for their services.’

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For financial advisors, telling their clients that they “add value” is one thing, but providing them a number that actually demonstrates it makes the argument more compelling.

Russell Investments Canada Ltd.’s 2019 Value of an Advisor Study, published in May, suggests that the value a trusted advisor adds to an investor’s portfolio – apart from investment gains – is 2.79 per cent this year, which “materially exceeds the 1 [per cent] fee [advisors] typically charge for their services.”

In a recent interview, Sophie Gilbert, head of business solutions at parent firm Russell Investments Group LLC in Seattle, discussed the report’s findings and what it means for Canadian advisors and investors.

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Why did Russell Investments create a formula to quantify an advisor’s value?

Many advisors have moved from being the stock selector and portfolio creator to having a more advisory, planning-based, holistic relationship with clients. Usually, that transition happens pretty smoothly until about a year or 18 months into the relationship, when advisors suddenly begin to get questions about their fee schedules. Most advisors freeze at that point and feel like they need to justify their fees. Often, their gut instinct is to discount their fees. As a firm that believes advisors add a tremendous amount of value to investors and help them achieve their long-term outcomes, we wanted to help advisors articulate their fees with conviction and confidence in a way that’s memorable and repeatable. That way, when they get the inevitable fee question, hopefully they feel equipped not to fear that conversation but instead to relish it.

How did Russell Investments decide on the five specific factors the study tracks?

They came from conversations with advisors and from our own perspective – and they have evolved over time. We’ve always had “A” (annual rebalancing of investment portfolios), “B” (countering the behavioural mistakes individual investors typically make), “C” (cost of basic investment-only management) and “P” (planning costs and ancillary services). The “T” (tax-efficient planning and investing) was added more recently as we began to see a divergence between tax-managed results and non-tax-managed results. They’re not necessarily surprising categories, but the power comes from the formula’s simplicity. An advisor can easily remember “ABCPT” and describe it in a way an investor can understand.

Did any of the findings surprise you?

What has been most interesting to see is how the values have changed over time relative to one another. During the five years we’ve been doing the report in the United States, “T” is the one value that has gone up in that period; the others have all gone down a little bit. “C” has been interesting because it has fluctuated. Robo-advisors discounted their prices to such a low level that they realized there was no way to reach profitability if they persisted like that. So, in the past couple of years, they have started increasing their prices slowly.

Are there significant differences in the value an advisor provides around the world?

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The value of an advisor works out to be 4.6 per cent in the U.S., 4.4 per cent in Australia and 2.8 per cent in Canada. So, yes, there are differences. Some of the biggest are in the “B” and “T” aspects. In Canada, the behavioural aspect contributes less. Some of that relates to the start and end dates for the data and how the local market performed during that time; some of it is because home-country bias is more egregious in some countries than in others. The tax aspect varies because of differences in local tax regulations, the types of investment solutions that are available and what tax-incentivized retirement savings plans look like.

Sophie Gilbert, head of business solutions at Russell Investments Group LLC in Seattle.

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How can an individual advisor add extra basis points and go beyond the average?

Not a lot of advisors focus on tax-smart planning, which makes that an area in which advisors have an opportunity to differentiate themselves and help clients achieve desired outcomes more successfully. When investors pay less in taxes and keep more money in their portfolios, advisors who charge fees based on assets under management earn more revenue. In addition, offering tax-smart planning is a way to demonstrate to the high-net-worth audience, which many advisors would like to attract, that “I understand your ecosystem. I understand what’s important to you. I have solutions that are tailored specifically to that. So, let’s sit down and talk.”

What do you hope advisors will take away from the report?

With the rise of index funds and robo-advisors, and with everything else that’s been going on, it has been easy for advisors to start questioning their value. Our hope is that this report makes it clear that what advisors do is really important and that, without their advice, the outcome for clients would look really different. Clients are actually getting a good deal. When I talk to advisors about this, I always feel like we all walk out of the room having grown by an inch or so. Overall, our intention is to equip advisors with confidence and conviction so they feel good about what they do and continue to do it. We need more advisors in the world, not fewer.

Highlights from Russell Investments’ 2019 Value of an Advisor Study

In Canada, the value an advisor provides this year is 2.79 per cent, broken down as follows:

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A (annual rebalancing of investment portfolios) = 0.20 per cent

B (behavioural mistakes individual investors typically make) = 0.80 per cent

C (cost of basic investment-only management) = 0.35 per cent

P (planning costs and ancillary services) = 0.78 per cent

T (tax-efficient planning and investing) = 0.66 per cent

This interview has been edited and condensed.

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