8 Undervalued Ways an Advisor Contributes to Financial Planning

by | Apr 3, 2018

A professional, independent financial advisor can add considerable value to a household’s wealth over time, but not in the way that many people would think.

Being a financial advisor goes beyond simply selecting an investment product or deciding which funds to invest into. Considerable thought and effort is spent on some of the less noticeable aspects that often can have an even bigger impact on a client’s wealth, over the long-term, than purely investment returns.

Various studies have found that what investors gain from employing a financial advisor far outweighs what they pay in advice fees. A study by our investment partner, Morningstar, put a number to this added value: 1.82% a year. This may not sound like much, but over many years it compounds to form a considerable portion of an investor’s assets. A second study, by the Centre for Interuniversity Research and Analysis on Organisations (Cirao) in the United States, found that households that had used a financial advisor for between four and six years possessed 58 percent more financial assets, on average, than those that hadn’t.

What is interesting is that this added value did not come from the advisors choosing better-performing investments than the investors could necessarily have chosen themselves. The Morningstar report found that it is not the performance of specific investments in a portfolio that determines long-term value to the investor. Rather, it is several factors that many investors tend to overlook that makes the biggest difference.

So, how do advisors really add value? Below are a few factors that contribute to the overall financial plan.


1. Focusing on the long-term and providing guidance through market fluctuations

Advisors sometime take on the role of psychologist when markets aren’t moving in the right direction and investor panic starts to set in. Being the calming voice of reason can have unbelievable benefits as opposed to making irrational decisions based on fear or greed. Advisors also help clients to identify their biases. Many of us think we don’t really have any … which is exactly the point.


2. Drawing up a financial plan with the goal of meeting a client’s specific requirements.

Advisors are required to undertake a thorough analysis of their clients’ personal circumstances and financial needs before drawing up a financial plan, recommending investments and building a portfolio. Establishing that plan can make a huge difference along the road as you will always know whether you are on track to meet your goals or if corrective changes need to be implemented.


3. Allocating assets based on appropriate levels of risk.

Investment capital is allocated across the main asset classes of equities, bonds, listed property and cash, as determined by the financial needs analysis and financial plan drawn up by the advisor. We put a significant amount of effort into effectively managing our model portfolios to streamline this process to protect our clients and offer actively managed solutions.


4. Identifying risks in clients’ portfolios that the clients might look past.

Examples include being overweight in South African assets, chasing equity performance, being too conservative for the long-term, having insufficient manager diversity and being too concentrated in a single market sector or company. All these aspects are managed via our model portfolios with the assistance of Morningstar.


5. Ensuring a sustainable withdrawal strategy.

This applies to clients drawing an income from their investments. The Morningstar research found that advisors added value by using a “dynamic” strategy whereby the withdrawal amount is regularly reassessed in the light of market conditions to ensure that the portfolio and income arising from it are sustainable.


6. Ensuring tax efficiency.

This was one of the top ways in which advisors added value, the Morningstar research found. An advisor can help you take advantage of tax breaks that may be available to you but that you are unaware of. The more you save in tax, the more the money you save can work for you in your portfolio, adding to the compounding over time.


7. Checking that clients are saving enough to build sufficient retirement capital.

Perfect investment returns will not magically produce retirement income out of too little savings. An advisor can walk you through various projections and contributions rates that can assist in making sure you are on track to meet your retirement goals.


8. Pressing clients to answer questions they don’t want to be asked.

Advisors are there to ask clients how they plan to take care of their aging parents, whether their will is up to date, how they are going to educate their children or what they will do if they lost their jobs. These are important questions that add to the holistic financial plan that incorporates all aspects of a client’s life to ensure all goals and needs are met. Often these are questions neglected by individuals and proper considerations isn’t given to the potential effects.


Financial advice can differ considerably between clients, so having a financial advisor who is there to evaluate your situation and offer specific advice to suit your particular circumstances can prove invaluable over the long-term.