There’s now a math formula for measuring the value of an adviser.
Let’s duck the nitty-gritty math for a second to look at the big picture. According to Russell Investments Canada, the value added by an adviser can be as high as 2.88 percentage points. That’s enough to offset even the most onerous fees.
Here’s how Russell calculates that 2.88 per cent:
- Annual rebalancing adds 0.1 percentage point of value;
- Preventing behavioural mistakes by clients (stopping them from selling at market lows) adds one full percentage point;
- Basic investment management adds 0.4 of a point;
- Planning and ancillary services at 0.72 of a point;
- Tax planning adds 0.66 of a point.
The perfect adviser adds 2.88 percentage points of value. How does your adviser stack up? Russell’s formula points the way to finding out. Start by recollecting the dealings you’ve had with your adviser since the market plunge in March, and over the previous 12 to 18 months. Has your adviser:
- Talked to you about account rebalancing, which means selling some of your winning holdings to buy more of your losers so your stocks/bonds mix stays true to your target asset allocation model?
- Encouraged you to buy at a market low and/or persuaded you not to sell at a market low?
- Provided consistent and productive help in managing your portfolio?
- Produced a financial plan for you?
- Discussed the tax implications of your investments and broader financial plan?
Don’t just mentally tick a yes, no or maybe box for each aspect of adviser value. Consider what was said by your adviser and how it has played out in both your investment results and your level of confidence in meeting your financial goals.
Next step, bring your advice fees into the analysis. Russell applied a 1-per-cent fee against the 2.88 percentage points of value, which suggests a net gain of almost two points. However, many investors pay more than 1 per cent for advice and there are additional fees for products. Add advice to product fees and then consider how your adviser is offsetting them with value.
The actual percentage calculation of value is subjective and thus not something you need to dwell on. What matters is that your adviser is doing the things that high-value advisers do – planning, guiding you through market crashes, rebalancing, being a good steward of your investments and minding your taxes.
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