By Monica Johnson, International Banker
Since the 2008 global financial crisis (GFC), it’s fair to say that the world of investing has changed dramatically. The growth in popularity of passive-investment strategies, the widespread application of technology and innovation in the investing process through such services as robo-advisory, and the general expansion in opportunities for investors of all experience levels to access financial markets through trading apps and digital brokers all mean that the rigid barriers to investing that existed once upon a time have all but fallen by the wayside over the last decade.
With investing made significantly easier for the ordinary retail investor, one might wonder whether there is much point in utilising financial advisors—or, indeed, any investment professionals whose main goal is to maximise clients’ investment returns. Indeed, with so many resources available online through investor-education sites and the proliferation of market data, it may seem that financial advisors are fast becoming an endangered species. And yet their skills and advice remain as sought after as ever—and with good reason.
A 2019 paper published by Vanguard, one of the world’s biggest investment advisors, found that a competent financial advisor can boost returns by up to 3 percent. “’Putting a value on your value’ is as subjective and unique as each individual investor. For some, the value of working with an advisor is peace of mind. For others, we found that working can add about 3 percent in net returns through following the Vanguard Advisor’s Alpha framework for wealth management, particularly for taxable investors,” the paper noted, although it emphasised that this is unlikely to be an annual value-added but rather an intermittent benefit. “Some of the best opportunities to add value occur during periods of market duress or euphoria when clients are tempted to abandon their well-thought-out investment plans.”
Indeed, entrusting one’s financial health to an advisor can understandably be a daunting prospect, especially as it requires placing trust in the hands of someone else. Nevertheless, several reasons remain as to why financial advisory remains popular; whether you are a novice when it comes to financial markets or a high-net-worth investor, the opportunity to have an objective investment partner cannot be underestimated.
Perhaps most importantly is the plain fact that investment professionals have, on average, considerably more experience than the ordinary retail investor. Not only does this bode well in terms of having the ability to more accurately anticipate future market scenarios—and, in turn, likely future returns—but it also means that the professional has the skills and expertise required not to be swayed by non-relevant, non-market related factors vis-à-vis the less experienced investor. Such influences could include the recommendations of peers, friends and family or perhaps tips provided by market analysts and “gurus” who may not necessarily have the same investment goals when making recommendations.
The myriad of cognitive and emotional biases that have long plagued investors and their decision-making processes—including loss-aversion bias, confirmation bias, the Dunning-Kruger effect and many more—can all end up leading to the less-experienced investor ultimately achieving sub-optimal returns. And while financial advisors are hardly impervious to such biases, the experiences they possess—not to mention the formal systems and frameworks they have in place to ensure that every investment decision is taken as objectively and methodically as possible—mean that it is likely that such external influences will play a minimal role in the investing process of a professional outfit on a consistent basis.
The resources that are required to make those optimal investing decisions should also not be discounted. Whether it’s the time taken to research various investment targets, the energy and mental focus required to learn about finance or even the financial cost of gaining investing experience, the overall process is far from simply being a matter of casually creating a portfolio of a few companies in one afternoon and then hoping for the best. On the contrary, it is an endeavour that demands consistent supervision and frequent changes in portfolio allocation.
That’s not to mention the due diligence on top of the investment research that is often necessary before investing, particularly when it comes to less recognised asset classes. While the likes of equities and bonds have fairly standard methodologies for research and due diligence, there are other assets such as commodities and alternative investments that are often not as standardised. Indeed, such asset classes are increasingly popular for both the returns and diversification benefits they can provide to an investment portfolio. But they often require greater scrutiny, especially if trading is typically conducted off-exchange or over-the-counter.
In many instances, the necessary due diligence requires specialist intervention. Real estate, for example, demands considerable due diligence before investors decide whether to buy or not, including over issues pertaining to the land such as ownership, title, valuation and taxation. By opting to take the financial-advisory route, the due-diligence process can be made much easier. Again, it is a case of expertise when conducting such matters that makes the financial advisor a vital part of the holistic investment process.
Investors must ask themselves, honestly, if they can set aside the necessary resources to make the best decisions for their portfolios consistently. If not, a financial advisor may well make sense. A professional will tend to have sufficient analytical infrastructure in place to keep making well-informed investment decisions. Such infrastructure will typically include sophisticated risk-management software and models, powerful IT (information-technology) systems for data analytics, accessibility to a diverse range of financial markets and products, and a comprehensive support network that would typically comprise some or all of a middle and back office, legal and compliance professionals and established relationships with other finance professionals and services. A financial advisor can leverage all of these perks to achieve superior returns vis-à-vis the retail investor.
This matter becomes even more important for affluent investors such as the high-net-worth and ultra-high-net-worth segments. Should you fall under this bracket, then using an advisory service such as a family office—that is, a private wealth-management advisory firm that provides a comprehensive outsourced service to wealthy investors—can be hugely beneficial. Given that there are typically a number of additional considerations such individuals must take into account when attempting to optimise their wealth and investments, a family office can often represent an efficient one-stop shop that can address the bulk of their needs. In practice, this means a team of investment professionals will be on hand to look after such matters, including tax planning, estate planning, budgeting, education savings, charitable giving and insurance.
Again, such ancillary activities require an abundance of time and energy to fully comprehend and then take the optimal decision regularly. Typically, a family office will provide a service that addresses all such aforementioned activities as standard, meaning that in terms of both experience and efficiency, it offers considerable advantages over deciding to “go it alone”. Even simply in terms of organisation, family offices have the infrastructure in place to keep records and alert clients of any changes that need to be made in a timely manner, thus avoiding any potential errors that may arise from being negligent.
And perhaps among the most important benefits to using financial advisory is the formalised approach taken in planning for unfavourable market conditions. Should the stock market crash, for instance, it will invariably be the case that an individual investor will have made insufficient portfolio allocations to account for such an event. More likely, massive losses will be realised. And while losses may well arise when facing such market conditions upon taking the financial-advisor option, it is highly likely that through careful planning, those losses can be minimised; what’s more, the advisor will have the experience and risk-management infrastructure required to suitably rebalance the portfolio to reflect the pronounced changes in the market environment. Ultimately, this could well make the difference between sinking or swimming through torrid market downturns and ensuring financial survival over the long run.
Of course, not everyone will need the services of a financial advisor. Those with the necessary experiences, skills, time and energy to closely monitor and analyse financial-market movements may well feel confident enough to remain self-directed. And they may even have the track record to justify this decision. But for everyone else, knowing that professional help is on hand to guide the investor through the tougher decisions—of which there will be several—should be enough to seek consultation when required.