We all know that financial advice adds value and is worth paying for. Instinctively, it’s a given. And it is backed up by independent research. According to ICL-UK:

Advice has added £2.5 billion to people’s savings and investments*

*Calculated based on those who received advice between 2001 and 2007, and its estimated impact on outcomes from 2012-2014.

However, a challenge faced by many advisers in our post-MiFID II world is how to demonstrate this value. Full transparency means clients can see exactly what they’re paying for advice, as well as their investments, products and platforms – and want to know what they’re getting in return.

The articles we’ve shared on this topic have been among the highest read on our site over the past six months, so this week we decided to dive a little deeper following a conversation with DAN from TCF Investment.

In case you missed it: this is how advisers are demonstrating the value of their advice

It’s a simple formula

According to Russell Investments, financial advisers add 4.4% p.a. in value to their clients (covered in our recent article). To get to this number they applied the following value formula:

The Value of Advice

 

What does this mean in pounds and pence?

DAN has compiled a body of research along a similar vein, which he shares in his CPD accredited workshop series (you can see him present at this event next week). Along with his presentation, he shares materials with a wealth of ideas advisers can implement in their businesses immediately. Below are a few insights I gleaned from our discussion.

 

The DAN Value Formula (you guessed it, I just made that name up):
Investments (A) +

Financial Planning (B) +

Risk Management (C) +

Tax Planning (D) +

Unknowns (E) +

Ups & Downs (F)

 

 

 

=

 

ADVISER VALUE ADD

 

Let’s dive deeper

 

1. Your investment proposition, according to Dan’s research (and he uses a LOT of examples) can add additional value of 2% p.a. – IF you have a good process (this is above the value created by asset allocation and diversification at +1%).

This will amount to £3,000 per year for a client with £150,000 invested. Or £10,000 per year for those with £500,000.

 

2. Financial Planning, which encompasses the following:

» Save tax

» Pre-fund investments

» Reduce platform/wrapper costs

» Make the complex simple (cashflow analysis)

» Help you avoid common mistakes

» Increase protection – FSCS

» Reduce risk and improve returns

» Hold your hand tight through difficult times

» Spot opportunities

» Keep your portfolio up to date

» Help you work out and achieve financial goals

» Assess the risk profile

» Reduce paperwork

» Keep investments on track

» Access experts

» Liaise with accountant and solicitor

If we take just one element ‘reduce platform/wrapper costs’, a client choosing a direct to consumer platform (without face to face advice) could end paying over 1% p.a. more than they think, due to the differences between the “platform fee” and “actual costs of running the portfolio”.

A low-cost adviser selected platform could deliver significant cost savings up to 1% p.a. – amounting to further value of £1,500 on £150,000 or £5,000 on £500,000 invested.

 

3. Risk Management involves determining the clients attitude to investment risk, ensuring they stay invested for the long term and don’t deviate ‘off track’ when they see bumps in the road. Effective diversification, alignment of the clients long term goals to their “ideal” portfolio can reduce the chance of loss by 3% (in any one year).

 

4. Tax Planning, ensuring the client uses all their available allowances and reliefs can add a tremendous amount of value. For example, creating a tax-efficient plan based the client’s individual circumstances could:

» Earn £1,000 tax free on their personal savings (basic rate taxpayers)

» Invest up to £40,000 in their pension p.a., with relief on those contributions

» Invest up to £20,000 each year, tax efficiently via an ISA

» Utilise their £12,000 capital gains allowance

» Draw income tax effectively using their personal allowance, savings allowance, ISA and other allowances in combination

» Earn £2,000 on dividends, free of income tax

» Reduce potential IHT liabilities

» Explore the applicability and use of specialist tax efficient products like EIS and VCTs

 

Efficient tax planning can save clients between 1% and 2% p.a.

 

5. Managing Unknown Unknowns, such as sequence risk or ‘pound cost ravaging’ can have a massive impact for those who require a regular income, ensuring the client’s retirement pot lasts as long as possible.This could add an equivalent of £2,625 per year over 20 years (1.75% per year) to a £150,000 investment.

 

6. Managing the Ups and Downs by diversifying the client’s portfolio and minimising downside risk through diversification to achieve better overall returns (even in a Cautious Portfolio) has added 1.5% p.a. return over inflation over the last 20 years – whereas investors staying in cash would have seen negative real returns. Implementing the investment solution at a lower cost can add a further 1% p.a.

 

Bringing it all together

 

If we add it all up, here’s what we get:

Initial investment Investments
(A)
Better processes
Planning
(B)
Lower
platform
fees
Risk Management
(C)
One off year drop reduction
Tax Planning
(D)
Unknown
Unknowns
(E)
Ups & Downs
(F)
Better returns and lower charges
TOTAL (per year)
£150k £3,000 £1,500 £4,500 £1,500 £2,625 £3,750 £12,375
£500k £10,000 £5,000 £15,000 £10,000 £8,750 £12,500 £46,250

 

That equates to £12,375 p.a. for a client with £150,000 to invest and £46,250 p.a. for a client with £500,000 to invest. Wow.

 

And it gets better: the value of advice increases over time

The savings and investments of a client advised over more than 15 years’ will be 2.73x larger than a non-advised client. Even a client advised over just 4-6 years will achieve a pot 1.58x the size**

**According to research by Claude Montmarquette, CIRANO 2012.

 

DAN from TCF Investment said:

“Since the financial crisis we have seen markets heading in one direction only, post MiFID and in potentially more choppy investment waters, advisers will likely need to more clearly show the value they add. There are literally hundreds of ways that advises add value – time to stop hiding the professionals light under a bushel and showcase this to clients in clear pound note terms”

Another resource for advisers

I discussed the content of this article with a few of our adviser contacts and they recommended I take a look at EDVOA. Have you heard of it? It’s an online tool for financial advisers, designed to put a value on your advice and help clients understand just how much it’s worth.

The output is an annual, personalised statement for each client, which demonstrates the value of your advice, tax and cashflow planning – in pounds and pence. The PDF output is also branded with your company logo.

Check it out on the EDVOA website.

 

A final word…

If you would like to see David A Norman (aka DAN) in action, sign up for next week’s event here. Alternatively, you can email him at david.norman@tcfinvestment.com