CPD: The value of advice – harness your expertise

From

Harness your expertise to add value to the client relationship.

The value of advice cannot always be readily quantified. It’s so much more than simply making money for clients, although that is a key factor. Being able to articulate value is important for advisers, particularly during periods of uncertainty and the expertise advisers bring to the table is an integral element of this value. This article, proudly sponsored by Russell Investments, examines the value of financial advisers.

Financial advisers play a crucial role in supporting their clients by assisting them to assess their changing goals, needs and circumstances. Their significance becomes even more pronounced during times of transition and uncertainty. Consider the current environment: geopolitical unrest in different corners of the world, volatility in financial markets, increasing interest rates and spiralling inflation in developed economies. This scenario provides challenges at both the individual and macroeconomic levels.

A comprehensive wealth management approach involves a thorough discovery process, ongoing strategic planning and continuous coordination; this can be particularly challenging when emotions are heightened, and uncertainty prevails.

Those advisers who helped their clients remain invested through the turbulence of the pandemic, who helped them understand and deal with market volatility, who worked with them to re-evaluate goals and objectives through rising rates and inflation, can look back with a real sense of having provided true value.

To help you articulate that value, a recent paper[1] detailed the five factors that measure and quantify the value advisers bring to the table. These factors are:

  • asset allocation
  • behavioural coaching
  • helping clients through choices and trade-offs
  • expertise
  • tax savvy planning.

Parts one and two of this series examined the importance of asset allocation and understanding investor behaviour as key inputs into the measurement of adviser value. Asset allocation can have a significant impact on whether a client achieves their investment goals; analysis has found that it drives more than 85%[2] of the investment outcome for an individual.

Understanding investor behaviour and related coaching will help keep clients focused on the big picture and to avoid falling prey to common investor emotions during periods of market volatility. In part three of this series, the remaining three factors will be unpacked: helping clients through choices and trade-offs, demonstrating your expertise and tax savvy planning and investment.

Choices and trade-offs

Advisers provide a holistic wealth management approach throughout a client’s financial life, acting as a financial coach whose work extends far beyond investment selection. While the adviser’s role in each client’s journey will start at a different point in life, the value an adviser can add from the beginning of the relationship is crucial. As you will have experienced, most people’s lives invariably become more complex over time; the growing complexity of the regulatory environment, family situations and social security are just some of the intricacies to be navigated. To help achieve an individual’s goals, an adviser will incorporate many inputs into the design of a personalised strategy.

Inputs into holistic advice will change as clients age and go through typical life stages; from early adulthood when they are accumulating assets to late middle age when preservation becomes a focus and, finally, to older age when their accumulated assets are drawn down and planning for aged care and the intergenerational transfer of wealth take precedence (figure one).

An increasing number of people will fall into the latter category over next 40 years. The 2023 Intergenerational Report forecasts the number of Australians aged 65 and over will more than double during this period, and those aged at 85 and older are forecast to more than triple. The number of centenarians in line to receive a letter from this King or next is expected to increase six-fold.

It’s not just that Australians are ageing as an overall population, average longevity has increased significantly. In fact, life expectancies in Australia are among the highest in the world and are expected to increase by an average of four to five years over the next 40 years for both men and women[3].

Implications

The ageing population, alongside increased longevity, means the financial affairs of a broad cross section of the community incorporate many choices and trade-offs that previous generations didn’t always face. For example:

  • The so-called “bank of mum and dad” has grown rapidly with adult children asking parents to fund mortgage deposits, as longevity delays inheritance and house prices continue to climb.
  • Grandparents are often asked to fund school fees as the cost of private education extends beyond the reach of parents.
  • Second marriages can add an extra layer to estate planning, particularly to provide for two sets of children.
  • The so-called sandwich generation must juggle the financial and emotional needs of ageing parents with those of their own children.
  • Divorce in later life can sometimes leave one or both partners with financial challenges, particularly in relation to retirement funding.
  • Older parents are sometimes asked to provide an early inheritance to adult children or grandchildren to supplement their income.
  • Older Australians have a broader range of retirement funding options to consider, including downsizer contributions to superannuation.

Each scenario generally requires detailed preparations and careful implementation of the selected approach to ensure no party is at a disadvantage that could derail their financial future or fracture family relationships. Advisers are an important link in this planning by offering, for example, assistance in striking loan agreements for parents providing mortgage deposits to adult children. By working closely with other experts such as lawyers and accountants, advisers can draw on their knowledge – and those of other specialists –   to develop solutions that protect the interests of their clients.

This process will include explaining any implications that a lay person may not contemplate and helping to avoid situations in which important decisions are made incorrectly or not considered at all. Irrespective of the scenario, each client has their own unique circumstances, preferences and objectives that require innumerable decisions over a lifetime. In many cases, these decisions require an adviser to draw on their expertise to recalibrate a holistic plan.

Things to consider

Personal circumstances

In the accumulation phase, individuals tend to plan for major life events; these might include establishing a career, buying a home or raising a family. These priorities change as individuals enter the preservation stage before retirement. Often, their health or that of elderly parents becomes a more important consideration. Finally, the distribution phase can involve decisions related to long-term care or managing the intergenerational transfer of wealth.

Personal preferences

Each individual has personal preferences that must be integrated into financial decision making. These may include a preference for lower or higher investment risk, for low-cost investments or for investing in ethical financial products.

Advisers can suggest appropriate options and also explain any trade-offs that may be required to implement those decisions. For example, they can help price-conscious investors understand that passive investments may be in conflict with ethical principles as a result of the composition of an underlying index – and, of course, suggest alternative strategies that may achieve their underlying objectives.

External considerations

External considerations can impact a wealth strategy as much as personal preferences or personal circumstances. In 2023, this is clearly illustrated by rising interest rates and high inflation, both of which are compelling many people to reconsider their financial situation.

It is also evident in the ageing population in terms of social security needs for older Australians and inheritance events and wealth transfer for younger generations. For the former, advisers can ensure older clients take advantage of available benefits such as the Commonwealth Seniors Health Card. And for those who inherit assets, an adviser’s role is to help manage those assets and minimise any tax impacts that arise.

Articulate and demonstrate expertise

Advisers are more than financial technicians and do far more than recommend investments. They are also specialists in human behaviour who build trusted relationships with clients that allow them to deliver on their recommendations.

In the best of times, advisers help clients achieve life-long goals and celebrate personal milestones along the way. But they also support people in challenging times – through trauma, illness, financial crises, job loss and death. This unique combination of technical skill and emotional expertise that is regularly demonstrated by advisers provides a priceless form of value to their clients.

In terms of technical expertise, regulatory change and product innovation are constants in the Australian financial system. Advisers are at the frontline of interpreting change to determine both the impact and, of course, opportunities for clients.

This is a real responsibility due to the poor level of financial literacy among Australians. A 2021 survey conducted as part of the federal government’s Financial Capability Strategy found Australians scored 68 out of 100 in terms of financial literacy[4]. There is an obvious need for improvement and advisers can help bridge the gap.

Retirement planning

Retirement planning is one of many examples where professional financial advice adds considerable value to the client. Legislative change and product innovation are quickly broadening the decisions both pre-retirees and retirees must consider as they age. The impending retirement of the majority of the Baby Boomer generation means more people than ever must establish income streams, make aged care decisions, and undertake robust estate planning.

But each of these decisions is not just financial – it involves a multitude of emotions as people leave the workforce and plan their final decades.

The empathetic adviser

The same applies to Australia’s complex social security system. The benefits available provide not just financial support but also the emotional security drawn from a government safety net. By ensuring clients access legitimate entitlements such as childcare rebates, family tax benefits or the Age Pension, advisers are helping people when they are most vulnerable.

When providing financial advice, technical proficiency plays a significant role; however, its efficacy is only part of the equation. The true hallmark of a successful relationship between adviser and client lies in the adviser’s capacity to establish a connection and cultivate trust. Beyond the numbers and strategies, the human element is essential to achieve optimal outcomes.

To deliver holistic advice, advisers must draw on essential interpersonal skills. Foremost among these is empathy, a quality that enables advisers to understand and resonate with their clients’ emotions and perspectives. Empathy allows advisers to fully understand each client’s unique circumstances and concerns and fosters a deeper connection.

Care is another indispensable element. Clients want to feel not only understood but also genuinely cared for. This goes well beyond the transactional aspects of financial advice and creates a sincere concern for the well-being and financial success of the client. Demonstrating care creates a sense of security and reassurance, reinforcing the foundation of trust in the relationship.

Finally, genuine curiosity is important to create successful client-adviser dynamics. Advisers who approach their clients with an authentic desire to understand their goals, aspirations and challenges create an environment of open communication. This curiosity not only aids the adviser to tailor financial strategies to align with the client’s unique circumstances, but also reinforces the client’s confidence in the adviser’s commitment to their financial wellbeing.

Problem-solving practitioners

Understanding financial markets and portfolio construction is key to advisers’ training and experience. Advice teams are consistently researching investment solutions by decoding technical terminology to determine what is appropriate for different clients.

The value of working with an experienced adviser is about tapping into the accumulated expertise they’ve developed over their career. Together with ongoing education, this insight grants them problem-solving skills that can be leveraged by clients at all stages of their lives.

The adviser’s role

Through good times and bad, as clients’ needs evolve, an adviser can play different roles.

Guide

A trusted adviser can help manage both the practical and emotional burden of decision making with clients who may be overwhelmed by their financial affairs. For other clients who opt for control, advisers can act as a coach, or sounding board, who provides support to the person and their family.

Guru

In many circumstances, an adviser is both an expert and voice of reason. This includes disseminating knowledge that can improve a client’s understanding as well as imparting the objective wisdom gathered during a career.

Gladiator

If needed, an adviser can be an advocate on a client’s behalf. This could mean challenging a refused insurance claim, chasing beneficiary payments or managing the administration of finances. This allows a client and their family to focus on what is important to them at that point in time.

Tax savvy planning and investing

Tax knowledge is as much part of an adviser’s role as a grasp of markets or estate planning. In fact, the importance of tax know-how becomes more critical every year. This is perhaps most obvious in superannuation due to the continued introduction of caps designed to limit the amount of capital that people can hold in tax-effective retirement funds. it is, however, equally important outside superannuation, in both investing and social security related matters.

Super-charged retirement

Salary sacrifice is one of the most potent tax-effective investment strategies advisers can implement across a majority of their working-age client base.

For older clients, transition to retirement strategies can deliver real benefits by allowing people to add extra to super without reducing their take-home pay. But such strategies can prove complicated for individuals to arrange without the help of an adviser who has a working knowledge of all the requirements.

And, for those with a higher super balance, alternative vehicles such as investment bonds and company structures are an option worth considering as the proposed implementation of an additional tax on earnings on super balances above $3 million draws closer.

Advisers can walk clients through these sometimes complicated alternatives – explaining both the pros and cons – and undertake any implementation on their behalf to ensure it is completed in an optimal fashion.

Beyond super

Outside this planning, advisers can provide expert guidance on a range of tax-related matters such as:

  • Investment solutions that use low turnover strategies, tax minimisation overlays or centralised portfolio management
  • Insurance strategies that allow clients to hold polices in super, thereby providing tax benefits that can be reinvested
  • Entitlement to social security payments such as the Childcare Subsidy, Family Tax Benefit and Parental Leave Pay
  • Eligibility for seniors’ benefits such as the Age Pension, Commonwealth Seniors Health Card and Home Equity Access Scheme
  • Small business grants and incentive payments.

Getting it right

Individuals can easily be wrong-footed by tax rules and face penalties for decisions that advisers would foresee and prevent. The fact that only 12 percent of people consider overall tax effectiveness as among the top three considerations when making investments[5] highlights the crucial role advisers can play in guiding clients to better wealth outcomes.

It’s important to note that tax is not just the realm of the accounting profession and not limited to the items included in an individual’s tax return. By reinforcing these key points to clients, advisers have a significant opportunity to establish their credentials as invaluable service providers over each client’s entire life.

Continued economic uncertainty and geopolitical tension provide an ideal time for advisers to reassess the full value they offer to their clients – and to articulate it to them clearly.

Many advisers have worked with clients during recent market volatility to help them stick to planned investment strategies and navigate other areas of their financial affairs. By helping clients avoid the behavioural mistakes that many investors made in the market turbulence, you’ve likely already provided value far above and beyond your fee.

Add to that your other services – appropriate asset allocation, customised client experience and the expertise you provide, as well as the savings from a tax-effective approach – it seems clear that the total value advisers deliver to their clients is significant. Focus on the value you provide, and your clients will more readily recognise and appreciate it.

 

Take the FAAA accredited quiz to earn 0.5 CPD hour:

CPD Quiz

The following CPD quiz is accredited by the FAAA at 0.5 hour.

Legislated CPD Area: Client Care & Practice (0.5 hrs)

ASIC Knowledge Requirements: Financial Planning (0.5 hrs)

 

 

Notes:
[1]
Russell Investments, Value of an Adviser, 2023
[2] Russell Investments, Making Super Personal White Paper, 2020
[3] Australian Treasury, Intergenerational Report 2023, August 2023
[4] Australian government national financial capability survey 2021
[5] ASX Australian Investor Study 2023

You must be logged in to post or view comments.