The perceived value of financial advice differs across generations.

Introduction

“Clients don’t all value advice the same way. Expectations differ across generations”.
(Value of an Adviser, 2025, Russell Investments).

Understanding and articulating the value of financial advice remains a perennial challenge for the advice profession. The concept of value underpins the willingness of clients to engage with advice, their preparedness to be open and forthcoming (which can enable advice to be more effective), and their willingness to pay multi thousand-dollar fees for that advice.

Responding to this challenge, several foundational research projects have sought to identify and quantify the value of financial advice. Of these studies, both Russell’s ‘Value of an Adviser^[1]’ and Vanguard’s ‘Adviser Alpha^[2]’ research have consistently found that a financial adviser can improve a clients’ returns by 1.5 to 3.0 per cent or more per annum. Across both studies, a high proportion of this ‘alpha’ was attributed to coaching and mentoring clients, helping them avoid the poor decision making associated with behavioural biases.

But as useful as these value formulas and headline numbers can be – and certainly they can help advisers feel more confident in their value as professionals – they tell only part of the story. Value is not static, nor is it the same across different generations. The aspects of advice that are important to a Baby Boomer are not valued the same way by Millennials. And with a $5 trillion generational wealth transfer already underway, understanding these differences – and adapting one’s advice proposition accordingly – is now an existential imperative.

According to research^[3], around four in ten Australian financial advisers believe the generational wealth transfer is a threat to their business, with a quarter saying they have already lost significant assets through generational attrition. That same study found almost half (45 per cent) of advisers to be concerned they won’t retain the assets from clients’ heirs, reporting retention of assets 71 per cent of the time when a spouse inherits, compared to only 38 per cent when children inherit.

In the final article of our three-part series on the value of advice, we therefore turn our attention to the ways different client generations experience and perceive the value of financial advice.

Drawing extensively on the 2025 Value of an Adviser Report, published by Russell Investments, and supplemented by other respected sources, we will set out to explore the different aspirations, money behaviours, and engagement preferences that characterise the current and future generations of advice clients. In doing so we aim to equip advisers with the means to better understand, serve, and form enduring relationships across generations, helping futureproof their businesses.

A formula for advice value

Over more than a decade, Russell’s Value of an Adviser (VoA) research study has tracked and quantified the value of financial advice around the world. Underpinning their methodology has been their VoA formula, which breaks advice value down into several components and attributes a potential value to each of those components.

Those components, along with their 2025 measured values, are shown in the table below.

But the numbers only tell part of the story

As explained in an earlier article in this series, a problem constantly faced by advisers is that much of their work is behind the scenes and invisible. This can manifest as a lack of client understanding and appreciation of what value the adviser is adding, which can in turn make conversations about financial advice fees challenging. In this context, being able to quantify the value added each year is clearly helpful. But focusing on value in purely quantitative terms ignores the fact that – from a client’s perspective – the real benefits of advice are emotional.

In Russell’s 2025 survey, 89 per cent of advised clients said feeling more confident and knowledgeable about their finances was the #1 most important benefit of advice, while 86 per cent rated feeling more in control of their finances as a top benefit. 85 per cent of clients said feeling supported in financial decision making was also important.

Are adviser misreading their clients?

Russell’s research also highlights an important gap between how advisers often frame their value and how clients actually experience it. While advisers may instinctively emphasise investment skill, portfolio construction and technical rigour, Russell’s findings consistently point to non-technical outcomes as the primary drivers of perceived value across life stages. For example, while 70 per cent of advisers strongly agree that avoiding costly mistakes is the primary financial benefit of advice, only 28 per cent of clients share that view. Similarly, the importance of feeling in control was underappreciated by advisers, with only 48% rating it highly (compared to 86% of clients).

These findings suggest that the emotional outcomes of advice are often delivered but under-articulated. While clients report benefits such as confidence, reduced anxiety and improved decision-making, it seems advisers do not always explicitly link these outcomes to the advice process. Russell’s findings suggest that value is more readily recognised when advisers help clients connect advice to these lived experiences, rather than assuming the benefits are self-evident.

Advice and quality of life

The FAAA’s 2024 Value of Advice Consumer Research^[5] reinforces many of Russell’s findings. Across all generations, advised Australians reported higher quality of life, greater financial confidence and lower financial stress than those without advice. More than nine in ten advised clients reported reduced financial worries and stress, while around half reported positive impacts on their mental health and family life. These are real, powerful outcomes that sit well beyond portfolio performance alone.

Importantly, these emotional benefits are not incidental; they are central to how clients experience advice and how they judge the value of a service that can otherwise be seen as intangible. Recognising where clients see value (and tailoring one’s approach accordingly) can help advisers delink their value from purely financial outcomes (such as returns) and make their client relationships deeper and more impervious to shocks.

Equally crucially, while these emotional benefits are widely experienced, the way they are prioritised, articulated and valued varies significantly across life stages and generations, as we will now explore.

Generational differences in advice value

FAAA’s 2024 research demonstrates that the perceived value of advice is not uniform across generations. Its findings show that Baby Boomers are most likely to associate advice with reduced financial stress and retirement confidence, Generation X with decision support and managing competing priorities, and next generation clients (Gen Y and Gen Z) with improved understanding and confidence to act^[6]. Emotional uplift across dimensions such as quality of life, financial confidence and financial satisfaction are also experienced differently across generations. These differences highlight that while advice delivers value across all age groups, the outcomes clients value most shift meaningfully with life stage, as shown in Table 2 below.

Baby Boomers: confidence and peace of mind amid high complexity
For many Baby Boomers, the value of financial advice crystallises most clearly at the point where financial decisions feel both irreversible and deeply personal.

As clients move into retirement or the years immediately surrounding it, the focus of advice shifts away from accumulation and optimisation and towards certainty, sustainability and peace of mind.

Retirement is unquestionably the most complex life stage from an advice perspective. Navigating complex and ever-changing rules around superannuation and income streams, Centrelink, tax, and aged care can be almost impossible without expert help.

The value of that expert help can be stark, with the FAAA study finding 88 per cent of advised Australians are satisfied they have enough money to last through their retirement, compared to 62 per cent of unadvised Australians.

Questions about income adequacy, longevity risk, health costs and supporting adult children bring emotional weight as well as financial complexity. In this context, advice is less about maximising returns and more about reducing anxiety, providing clarity and enabling clients to feel confident that their financial position can support the life they want to live, consistent with the values that are important to them. It is at this stage that the emotional benefits of advice, reassurance, reduced stress and confidence in decision-making become most visible, and most highly valued.

A preference for human led engagement

A notable difference between Boomers and younger generations can be found in attitudes to engagement and communication, with Boomers exhibiting a stronger preference for face to face, human-led engagement.

Close to 3 in 5 Baby Boomers prefer human-led advice only, which only decreases to 1 in 2 among Gen Y^[8]. A total of 4 in 5 Baby Boomers believe that personalised guidance can only be provided by humans as opposed to digital-only advice, compared to fewer than 3 in 5 Gen Ys and Gen Xs.

Similarly, Baby Boomers are also more likely to believe experience and judgement, tailored risk assessments, and motivation to follow through can only be provided by human financial advisers compared to the younger generations.

Block out the noise

As the generation that has more time on their hands, and more time to check their balances, Boomers can be more susceptible to short term thinking and more easily distracted by the ‘noise’ around investment markets – from the tv, from Facebook, and from their friends at the golf club. Helping them ignore this noise – by focusing on progress towards goals and the specifics of their own plan – is critical to keeping them on track.

Keeping language simple and jargon free is also important. Jargon doesn’t make you look like an expert; it simply looks like a cloak that undermines trust. Complexity increases anxiety without improving outcomes.

GenX: the sandwich generation managing competing pressures

While Baby Boomers value advice primarily for reassurance and retirement certainty, Generation X tends to value advice for a different reason: help managing competing priorities at a time of peak responsibility. Often described as the ‘sandwich generation’ – stuck in the middle between their children and parents – Gen X clients are more likely to be balancing senior career roles, dependent children, ageing parents, mortgages, school fees and long-term retirement planning simultaneously. While they may be at or near their peak earning capacity, they are also time-poor and mentally overloaded, with little margin for financial mistakes.

FAAA’s research reflects this reality. Compared to Boomers, Gen X clients place relatively greater emphasis on decision support, confidence in trade-offs and having a trusted sounding board. The value of advice for this cohort is less about long-term reassurance and more about helping them make good decisions under pressure. Advice is experienced as a way to reduce mental load, clarify priorities and navigate competing demands, rather than simply as a source of technically driven financial optimisation. This aligns closely with Russell’s identification of ‘choices and trade-offs’ as a core component of advice value.

Information overload

For many GenX clients, the challenge is not a lack of information, but an excess of it. Decisions around how much to save versus spend, whether to help children financially, how to manage debt, or how to adjust risk as careers evolve all involve trade-offs with no single correct answer. In this environment, advice adds value by providing a structure for making decisions, testing scenarios and checking goal alignment.

From an adviser perspective, this has important implications. Gen X clients often respond best when advice is framed as complexity reduction, not just recommendation delivery. Reviews that focus on scenario planning, prioritisation and decision frameworks can feel more valuable than detailed performance commentary. Flexibility and responsiveness also matter: this cohort is more likely to experience sudden changes in income, employment or family circumstances, and values advice that can adapt quickly as life evolves.

Convenience is paramount for the time poor generation

From an engagement perspective, Gen X tends to be more comfortable with digital channels than Boomers. They also tend to be more time poor, meaning the convenience and efficiency of digital engagement and communication channels is more highly prized, as is more flexibility in meeting times (such as after hours).

Unsurprisingly, research has found GenX to be enthusiastic early adopters of digital advice solutions.  According to Natixis^[9], the proportion of Gen Xers who signalled a preference for digital advice over in-person services had grown strongly, particularly post pandemic, and was now in the vicinity of 50%.

Next Generation advice clients: engagement, transparency and confidence

While Generation X values advice as a way to manage competing pressures, Millennials and Gen Z tend to engage with advice through a different lens again. For these ‘next generation’ clients, the value of advice is closely tied to access, understanding and trust, rather than longevity planning or complexity management alone. Many are earlier in their wealth journey, with shorter financial histories and fewer established reference points, which shapes both what they seek from advisers and how they prefer to engage.

FAAA’s research indicates that younger clients place a relatively stronger emphasis on confidence to act, understanding financial decisions and feeling informed, rather than reassurance alone. This aligns with broader industry observations that Millennials and Gen Z want to understand the ‘why’ behind recommendations, not simply receive them. Advice is valued as an educational and confidence-building process, helping clients make progress toward tangible goals such as saving, investing, managing debt and balancing lifestyle choices.

Russell’s research adds an important dimension to this picture. It shows that advice value is often experienced when advisers help clients articulate priorities and navigate trade-offs in a way that reflects personal values, including views on sustainability and responsible investing. For younger clients in particular, alignment between financial decisions and personal values can meaningfully influence trust and engagement, even where balances are still modest.

Earlier engagement improves retention

We started this article referencing the existential risk posed by the intergenerational wealth transfer, and as the beneficiaries of a sizeable portion of this transfer, it is worth reinforcing the importance of engaging next generation clients as early as possible.

Financial advisers who actively encourage clients’ children to be involved in the intergenerational wealth transfer conversation have higher retention rates, research from Australian Ethical has shown^[11].

Specifically, 31 per cent of advisers who involved clients’ children in these conversations retained more than 75 per cent of their clients, more than twice the rate of those who didn’t (14 per cent).

Get there before TikTok

Engagement style is a critical differentiator for this cohort, with next generation clients expecting transparent, responsive and hybrid (human/digital) engagement. While they still value one-on-one adviser relationships, they are more comfortable interacting through digital channels, and more likely to consume financial information from a wide range of sources outside the advice relationship. This creates both an opportunity and a risk for advisers: younger clients are highly engaged with financial content^[12], but that content is not always reliable, consistent or aligned with their personal circumstances. (Or legal!). The challenge for the advice profession is to get to them before TikTok does!

In this context, advisers add value by acting as curators and translators, helping younger clients make sense of conflicting information and apply it to their own situation. Clear explanations, plain-English summaries and open discussion of fees, trade-offs and risks are central to building trust. Rather than positioning advice as a once-a-year event, advisers may find greater engagement by offering more frequent, lighter-touch interactions that reinforce progress and maintain momentum.

For Millennials and Gen Z, trust is built through transparency, accessibility and shared understanding. Advisers who demonstrate responsiveness, explain decisions clearly and align advice to clients’ personal values and goals are better placed to establish enduring relationships with this cohort, and to differentiate professional advice from the noise of finfluencers and peers.

Practical implications for advisers: tailoring advice across generations

The research is clear that while financial advice delivers value across all generations, how that value is experienced varies meaningfully by life stage. Advisers who adopt a one-size-fits-all approach to reviews, communication and engagement risk under-serving clients whose priorities and pressures differ markedly.

Table 3 below distils these key differences down into practical ways to tailor the advice proposition by each generation.

Across generations, advisers should consciously adjust how reviews are structured, how information is communicated, and how value is articulated.

This includes:

• structuring reviews around outcomes and decisions, not performance in isolation
• keeping communication simple and jargon-free, particularly where complexity adds anxiety rather than insight
• providing context rather than commentary, helping clients filter external noise from media, peers and social platforms
• explicitly reinforcing progress and stability, even where no changes are required
• anchoring advice to personal values, including lifestyle, family and, for younger clients, sustainability and responsible investing
• using engagement channels that reflect clients’ time constraints and comfort with technology
• involving the next generation where appropriate to support continuity and trust across the wealth transfer.

Taken together, these adjustments do not require a fundamentally different advice process for each cohort, but they do require advisers to be deliberate about how advice is framed, delivered and reinforced for different generations.

Conclusion: futureproofing advice by understanding value

While financial advice delivers meaningful value across all life stages, that value is experienced, prioritised and articulated differently by different generations. Confidence, control, understanding and peace of mind matter to all clients, but the weight given to each outcome shifts as circumstances, responsibilities and goals evolve. Advisers who assume value is static, or who rely on a single narrative to explain their role, risk misalignment at precisely the moments when trust and relevance matter most.

The implication for the profession is not that advisers must reinvent their advice process for every cohort, but that they must become more deliberate about how advice is framed, communicated and reinforced. Russell’s Value of an Adviser research shows that value is most visible when advisers help clients make better decisions, navigate trade-offs and feel confident in their financial lives. FAAA’s findings reinforce that these emotional and quality-of-life outcomes are central to how clients judge advice.

Advisers who understand what different generations truly value, and adapt their engagement accordingly, will be better placed to build enduring, multi-generational relationships. In doing so, they not only futureproof their own businesses, but also strengthen the profession’s ability to deliver advice that is trusted, valued and relevant across generations. In the context of a generational wealth transfer already underway, this matters more than ever.

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Read the full series:

• CPD: The advice value unlocked by trust – 5.6% and counting – Value of Advice (Part 1)
• CPD: Transparency and communication – making the value of advice visible (Part 2)
• CPD: Futureproof – what different generations really value in advice (Part 3)

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References:
[1] https://russellinvestments.com/content/ri/au/en-gb/financial-professional/tools-and-education/business-solutions/value-of-adviser
[2] https://www.vanguard.ca/content/dam/intl/americas/canada/en/documents/gas/quantifying-your-value-to-clients-advisor.pdf
[3] https://www.adviservoice.com.au/2024/10/impending-great-wealth-transfer-threat-to-advisers-finds-natixis-investment-managers/#:~:text=With%20an%20estimated%20$3.5%20trillion,is%20crucial%20to%20retaining%20assets.
[4] https://russellinvestments.com/content/ri/au/en-gb/financial-professional/tools-and-education/business-solutions/value-of-adviser
[5] http://faaa.au/wp-content/uploads/2024/09/FAAA-Value-of-Advice-2024-Report.pdf
[6] Ibid.
[7] Ibid.
[8] https://faaaconnection.au/q4-2025/financial-advisers-continue-to-be-highly-valued-by-clients/
[9] https://www.moneymanagement.com.au/gen-x-drive-early-adoption-digital-advice/
[10] https://www.moneymanagement.com.au/engaging-next-generation-advice
[11] https://www.ifa.com.au/the-time-is-now-for-the-wealth-transfer-conversation-research-shows
[12] https://www.moneymanagement.com.au/engaging-next-generation-advice

The post CPD: Futureproof – what different generations really value in advice (Part 3) appeared first on AdviserVoice.

Addressing adviser–client perception gaps using transparency is a key driver of value in advice.

A perennial challenge for advisers, and indeed the advice profession overall, is to articulate the value of financial advice.

From a client’s perspective, advice can seem like a complex, jargon heavy, black box, with much of the work, and value, neither visible nor understood.

Add to that the fact that many clients will have had limited exposure to other advisers – and therefore lack any basis for comparison – and it is easy to understand why many clients are unsure whether they are receiving value commensurate with the fees they are paying.

From an adviser’s perspective, inability to articulate their value can lead to a crisis of confidence. Angst over justifying fees of many thousands of dollars can become deep seated, especially in years where investment returns are negative. This in turn can see advisers massively undervalue themselves and undercharge for their services, threatening the financial viability of their businesses.

Understanding the true value of advice is therefore critical for the long-term sustainability of advice relationships and the profession overall.

Russell Investments have – for several years – conducted in-depth research into the underlying drivers of value in financial advice. Over this period, they have been able to distil value down to a simple equation:

Value of Advice = A(sset allocation) + B(ehavioural coaching) + C(hoices and trade-offs) + E(xpertise) + T(ax savvy investing).

In a previous article  we explored these individual value drivers and touched on a new finding from the 2025 edition of their ‘Value of an Adviser’ report^[1] – the importance of trust and transparency in unlocking these individual components of advice value.

Having covered the role of trust in our earlier article, this second article in the series will explore the foundational role of transparency and communication in helping clients understand and appreciate the value of advice – primarily by making the generally unseen drivers of value more visible.

Where the value of advice lies

The robust methodology of Russell’s ‘Value of An Adviser’ study has been honed over many years and tens of thousands of data points.

This approach has enabled them to quantify the value of advice in terms of additional annual % returns, and in 2025 the results were as follows:

One of the regular standouts in their analysis is the value of ‘behavioural coaching’, measured at 3.1% per annum in terms of additional value for 2025. While some find this figure surprisingly high, there is a wealth of supporting data that reinforces the role advisers play in saving clients from making poor investment decisions, generally in market downturns. These include Vanguard’s Adviser Alpha study^[2] – which also put a value on behavioural coaching – as well as studies by Dalbar^[3] and Morningstar^[4] that show how poor timing, panic selling, and return chasing see most average investors underperform the market.

But whilst telling clients to sit tight and do nothing in a falling market may literally save them thousands of dollars, that ‘value’ may not always be attributed to the adviser – the client may forget the conversation by the time their annual review comes around, or they may simply not be conscious of the adviser’s influence in their decision to ‘sit tight’.

This brings to light a bigger challenge for advisers – the fact that client perceptions about where the value in advice lies may differ substantially from what we know to be true.

The client perception gap

Indeed, when advice clients were asked what aspects of advice they valued the most – there was quite a divergence, not only compared with the quantified value of advice formula (Table 1), but also with what advisers perceived to be most important to clients.

This difference was articulated by Russell in their inaugural ‘Value of an Adviser’ (VoA) Index, which ranked scores against a baseline index of 100.

According to clients, the top drivers of their satisfaction were technical and emotional expertise (E) with an index score of 118 and appropriate asset allocation (A) with 113. These significantly outpaced tax‑savvy planning (T) at 92, behavioural coaching (B) at 91 and choices and trade‑offs (C) at 88.

In terms of the emotional benefits of advice, advisers continue to rate the value of their own reassurance, clarity and behavioural coaching highly, while clients still prioritise control, understanding and personal relevance.

According to Russell’s report, 70 per cent of advisers say helping clients avoid costly mistakes is the top financial benefit of advice, but only 28 per cent of clients agree. Likewise, while 99 per cent of advisers believe reassurance is a key emotional benefit, just 78 per cent of clients share that view. Instead, 86 per cent of clients nominate ‘feeling in control of their finances’ as the greatest emotional payoff of advice, a benefit advisers tend to underestimate.

More alignment was found around the importance of advisers in supporting clients to make financial decisions. 98 per cent of advisers believe this to be the second most important emotional benefit of their advice, a view shared by 85 per cent of clients.

What advisers say versus what clients hear

The Russell report is not the first to pick up on these perceptual gaps.

One recent and highly relevant study of adviser communication skills also found clients and advisers were on different pages.

The study^[5] by Money Quotient, reported by Institutional Investor, found that advisers consistently over-estimate their own communication skills. Across key areas such as explaining goals, investment trade-offs and financial values, planners rated themselves 15 to 36 percentage points higher than clients did. While 84 per cent of advisers said they “carefully consider the terms and language they use”, only 51 per cent of clients agreed.

Why these gaps matter

Having a distorted picture of what clients value can lead to misdirected efforts and a false sense of security around their satisfaction and loyalty.

When advisers believe they’re communicating clearly, but clients still feel uncertain or confused, trust slowly erodes, not because of performance, but because of perception. The ‘illusion of communication’, can leave clients feeling uninformed even when the adviser believes every message has landed.

This can become an existential issue for advisers – an E Trade study^[6] of HNW investors found that 3 of the top 4 reasons for them to leave their advisers were communication related:

Transparency as communication in action

Transparency, along with trust, was identified as critical to unlocking the value of advice. This was found to be especially true in relation to advice fees, and here again the Russell data reveals a perceptual gap.

Clients rate the importance of transparent, easy to understand fees at 8.5 out of 10 but rate advisers’ performance at 8.2. Advisers rate their own performance higher (8.7) than their clients rated it.

It seems obvious that clearly explaining fees without jargon can strengthen trust and reinforce value. Taking time to walk clients through each cost, checking for understanding before moving on, and linking fees to outcomes can build confidence in the advice process.

But there is more to transparency than just fees. Transparency is about having clients understand exactly what is happening and why. Transparency – through more effective communication – is the adviser’s chance to make the often-invisible work they do and the value they add, visible.

Communication: the right channel and frequency can accelerate trust

Russell’s 2025 report highlights the tangible link between communication methods and client engagement.

While 91 per cent of advisers still rely primarily on in-person meetings, phone calls, and emails, those who use secure client portals or video calls connect an average of five times per year, compared with an overall average of 3.6 times across the survey. That difference in frequency, enabled by technology, correlates directly with higher perceived transparency and satisfaction.

Digital platforms and client portals can also help make the process and value of advice more visible. Being able to access dashboards, reports, portfolio updates and strategy notes in real time not only helps clients feel in control, it also demonstrates transparency and accountability, which can accelerate trust.

Transparency in this context doesn’t mean constant updates or information overload, it means recognising that a substantial financial knowledge gap creates a power imbalance, one which can leave clients feeling anxious and lacking control. Transparency which helps inform and educate clients helps reduce this imbalance, as well as being an opportunity to shine a light on some of the ‘behind the scenes’ work done by advisers.

Show the thinking behind decisions

The ‘Choice and Trade-offs’ component of the VoA formula is the most underappreciated driver of value in the eyes of clients, with an index score of just 88.

There is no question advisers create significant value by helping clients navigate competing priorities, such as liquidity versus growth, risk versus opportunity, tax efficiency versus simplicity.

But this value can vanish in translation if the client doesn’t see the deliberations behind the decisions. Transparency in this context means explaining the ‘why’ not just the ‘what’ of decisions.

While this approach is theoretically embedded into compliant advice processes – RG 175 requires advisers to show a concise statement of the reasons why “the advice and recommendation were considered appropriate, including in light of the alternative options considered”^[7] – it is not necessarily something that advisers draw attention to (and the extent to which clients engage with the SOA is questionable to say the least). Proactively discussing this process with clients underscores that every recommendation is the result of deliberate analysis. It demonstrates that advice is not transactional, but the product of disciplined reasoning and informed judgement.

Tax-smart transparency

With an index score of 92, the tangible financial benefit advisers deliver through tax-smart planning – the ‘T’ in the VoA formula – is also underappreciated, perhaps because tax rules are so complex and much of the work to optimise a client’s tax position is ‘quiet work’, such portfolio rebalancing to harvest losses, contribution timing, or offsetting gains in other accounts.

Proactively communicating and explaining these actions and articulating tax efficiency into dollar terms will give clients a clearer sense of the after-tax value of advice.

Beyond information – the role of empathy

Transparency is not a data-transfer exercise. Clients process information emotionally first and rationally second, meaning that over-communication without context can overwhelm. Empathy is critical.

Russell’s behavioural coaching framework underscores this: advisers add value not only by ‘what’ they say but by ‘how’ and ‘when’. Calming communication during volatility, celebrating milestones, and acknowledging client emotions are all part of behavioural transparency, showing clients that their adviser genuinely cares about them, and understands mindsets as well as markets.

Transparency without empathy is just a data dump, whereas empathetic transparency helps put clients at ease and builds trust.

Practical ways to systemise transparency

As the Money Quotient research found, there is often a divergence between what advisers believe they have said and what landed with clients. So, while some believe they are being effective at simplifying complex topics and relating strategies to personal goals, clients may be experiencing those same conversations as rushed or overly technical.

Bridging this divide requires a shift from assuming clarity to confirming it -in other words, ‘it’s about genuinely informed consent.

Simple tools, post-meeting summaries written in plain English, confirmation emails highlighting key decisions, or end-of-quarter recaps that explicitly restate agreed actions can all close the loop. In fact, any communication that is truly tailored to the client – rather than a generic one-size fits all piece – can help.

Some advisers are adapting evidence-based communication techniques such as ‘teach-backs ’to confirm client understanding. Asking clients to explain a concept back in their own words is not a test; it’s a trust check. When clients can articulate the rationale themselves, it signals that communication has truly connected.

Language is another layer. Financial services is a complex sector with its own jargon. But using this jargon to demonstrate your competence to clients, actually creates a barrier to trust, by reinforcing the information asymmetry – the knowledge gap – that exists between adviser and client. Using jargon-free language and being prepared to educate clients shows you are not using knowledge as power, or to build their dependency on you, but as a bridge, turning expertise into understanding and empowering clients.

This point was reinforced by a Morningstar study^[8] of the adviser behaviours which cause the most frustration to clients – use of jargon was a top 5 annoyance.

Conclusion: making the invisible visible

Transparency and communication are not peripheral to advice, they are how advice becomes visible, credible, and valued. The more advisers illuminate the reasoning behind their recommendations, clarify the trade-offs they have made, and explain outcomes in language clients understand, the more the unseen work of advice will be recognised for what it is: professional judgement exercised in the client’s best interests.

Ultimately, trust and transparency are foundational to advice. Trust allows clients to believe in the advice process, while transparency allows them to see it. In a profession where so much of the value lies beneath the surface, these two qualities ultimately allow the light in, allowing clients to see, understand, and appreciate, the true value of advice, and their adviser.

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Read the full series:

• CPD: The advice value unlocked by trust – 5.6% and counting – Value of Advice (Part 1)
• CPD: Transparency and communication – making the value of advice visible (Part 2)
• CPD: Futureproof – what different generations really value in advice (Part 3)

———–

References:
[1] https://russellinvestments.com/content/ri/au/en-gb/financial-professional/tools-and-education/business-solutions/value-of-adviser
[2] https://aemdam.assets.vgdynamic.info/assets/intl/australia/fas/documents/resources/Vanguard_Advisers_Alpha_RS23.pdf
[3] https://www.loricapartners.com.au/insights/how-investor-behaviour-undermines-long-term-success
[4] https://www.morningstar.com.au/personal-finance/how-to-earn-1-7-more-a-year-than-the-average-investor
[5] https://www.institutionalinvestor.com/article/2aucrzsa72lr93zd2kc1s/ria-intel/advisors-think-they-are-good-communicators-a-study-shows-clients-feel-differently
[6] https://www.fa-mag.com/userfiles/ads_2019/ETRADE_May_2019/AI_Report_Client_Retention_ver2.pdf
[7] https://download.asic.gov.au/media/pqpe0hwc/rg175-published-21-november-2024-20241219.pdf
[8] https://www.professionalplanner.com.au/2025/05/the-most-irritating-behaviours-exhibited-by-advisers/

The post CPD: Transparency and communication – making the value of advice visible (Part 2) appeared first on AdviserVoice.

What are the frameworks used to quantify the value of advice and the role of trust and transparency in unlocking value.

Introduction

Quantifying and articulating the value of advice has long been one of the biggest challenges facing the financial advice profession. Advice is an ‘intangible’ service where the benefits are not always obvious or immediate. It is also an increasingly expensive service, typically costing several thousand dollars at a time. Having clients – and prospective clients – understand the value they are receiving in exchange for these fees is therefore critical to attracting and retaining clients within the advice ecosystem.

Over the years, many studies have attempted to quantify the value add – the ‘alpha’ – of financial advisers. One of the most longstanding and respected studies is the annual ‘Value of an Adviser’ (VoA) research conducted by Russell Investments, the 2025 edition of which was launched in September of this year^[1]. As well as breaking down the advice process into several components, and measuring the value of each, Russell’s 2025 report digs deeper, examining the role of trust as a facilitator of value, the ways a client’s perspective of value can differ from that of their adviser, and how the differing needs of emerging client segments will require a more nuanced approach.

In this article, the first of a series of three examining the findings and implications of the Russell Value of an Adviser report, we will explore the measured Value of Advice (VoA) across 5 key components, from both the adviser and client perspectives. The findings will be compared with those of other studies conducted on this topic – including the FAAA ‘Value of Advice’ study released in 2024. We will also introduce the concept of trust as the bedrock of value in advice, one of the key findings of the Russell report, and the subject of the next article in this series.

Why articulating the value of advice is so important

Despite the obvious life changing financial and emotional benefits of financial advice, most adult Australians do not use the services of an adviser. Indeed, one survey^[2] from 2022 estimated just one in six, around 16%, currently use a financial adviser or planner, leaving over 80% unadvised.

To better understand the barriers to people seeking advice, it is useful to reference the comprehensive study released by ASIC in 2019, via Rep 627 ‘Financial advice: What consumers really think’^[3].

Among the questions asked of the respondents was the reasons why they ‘did not or might not’ get financial advice, to which the following responses were the most common:

While the perceived lack of value appears twice in the most mentioned barriers (in reasons 2 and 5), the view that advice is ‘too expensive’ is itself linked to a lack of perceived value. While it is true that for some people the cost of advice is simply unaffordable, assessing a product or service as cheap or expensive is often a construct linked to our perceptions of the value that product or service will provide us.

Value, and perceptions of it, also figure prominently in the factors that cause clients to leave their adviser. According to Morningstar^[5], the top reasons clients leave their adviser include:

• the quality of the advice (32%)
• the quality of the relationship (21%)
• the cost of the advice (17%).

To the extent that perspectives on cost and quality are driven by the perceived value added by the financial advice, being able to demonstrate and communicate the value of financial advice is clearly critical to both starting and maintaining client relationships.

The value of advice – what the numbers say

The Russell VoA methodology for quantifying the value of advice is based on a formula which breaks down the components of advice into 5 key areas and then estimates what each component adds, expressed as incremental % returns, or wealth growth, each year.

These components, and the 2025 results, are shown below:

The detail behind the numbers

A: Asset allocation

Asset allocation remains the biggest contributor to long‑term returns, and its influence cannot be underestimated. Against a backdrop of US policy uncertainty, geopolitical tensions, the Deep Seek AI disruption, and stubbornly elevated interest rates, global investment markets continue to shrug off bad news and have quickly returned to their peaks time and time again. Clients in default options within super, or those who are actively defensive, may have asset allocations poorly aligned with their risk tolerance and investment timelines. They are also likely to have left a lot of growth on the table, With Russell quantifying the value of effective asset allocation to be an additional 1.3% return p.a.

Advisers add value by designing portfolios aligned to each client’s risk tolerance, goals and time frame. They often diversify across a broad range of assets to optimise returns while managing risk, ensuring that clients capture market opportunities rather than sit on the sidelines. The following simple case studies demonstrate this point.

Case study 1- Emma

Emma increased her allocation of growth assets to 90% on her adviser’s suggestion. Based on historic returns her super may grow by an extra 1.3% per annum more than the typical balanced default super fund. Over 10 years this equates to almost $26,000 based on her circumstances.

Case study 2 – Ben

Ben started an SMSF as he liked the idea of control, but he is not an experienced investor and tends to have a more conservative allocation as a result. He holds 70% of the fund’s assets in cash, earning just 4.2% p.a. If he had sought advice and shifted to 50% growth assets (appropriate to his age and retirement plans), he could have achieved annual growth of 5.7% p.a., leaving him $23,000 better off after 10 years.

B: Behavioural Coaching

Renowned investor Benjamin Graham once said: “The investor’s chief problem – even his worst enemy – is likely to be himself.”^[7]And indeed, most individuals are poor investors, hostage to complex emotions and behavioural biases that generally see them buy assets when they are expensive (fear) and sell them cheaply (fear). Loss aversion, recency bias, overconfidence and herding behaviour all undermine the ability of ‘amateur’ investors to stay invested and optimise returns.

Aside from buying high and selling low, other common mistakes made by investors include staying out of the market too long (thus missing out on returns) and chasing past winners.

Data suggests the speed of market recoveries seems to be increasing, reinforcing the folly of trying to time market re-entry.

For example, as shown in the chart below (sourced by Russell from Morningstar), missing just the best 10 days of the S&P ASX 300 over the 10 years ended 31 December 2024, would have seen you forfeit around 64% of the total growth achieved over that period. Missing the best 20 days would have cost 91% of the total returns possible. Missing the best 30 days or more would have seen the investor go backwards.

By educating clients about these biases, and the wealth destroying consequences of emotionally charged investment decisions, advisers will be helping their clients stay calm and stay invested, leading to better financial outcomes overall.

Russell’s 2025 survey (of Australian investors) quantified the value of this behavioural coaching at 3.1% p.a. in incremental growth – a substantial amount in anyone’s language.

Other studies have similarly identified significant ‘alpha’ from adviser coaching. For example, Vanguard research^[8] estimated an uplift of 1.5% to 2% p.a. from the same source.

C: Choices and trade-offs

Financial advice goes well beyond investments. Life presents a web of challenges: juggling mortgage repayments with HECS debts, supporting ageing parents while raising children, assisting single older women with limited super, or managing the demands of impatient inheritors. Great advisers operate like elite coaches, combining technical knowledge with insight into each client’s personality and motivations. They guide clients through competing priorities and informed trade-offs over a lifetime, from buying a first home to planning aged care and estates.

This value isn’t measured in a percentage return; it shifts with the goals advisers help each person pursue.

E: Expertise

Advisers combine technical expertise with emotional intelligence to build trusted relationships. Their experience spans investing, Centrelink, retirement incomes, estate planning and beyond, giving clients guidance across every stage of life.

Financial products are complex, and the rules governing them shift constantly. Adviser skills are therefore critical when rules change (as regularly happens with super) ensuring client strategies remain optimised. Advisers also step in as advocates during disputes or negotiations (insurance claims for example), allowing families to concentrate on what matters most in difficult times.

With their trust, foresight and advocacy, advisers provide value that cannot be measured in percentages; it is an essential part of the Value of an Adviser formula that gives clients lasting confidence and peace of mind.

T: Tax-savvy investing

Selecting tax optimal structures – across investing, retirement savings, wealth transfer and insurance – is a cornerstone of quality financial advice, extending well beyond negative gearing, capital gains, or personal deductions. Advisers create value by optimising asset allocation across vehicles such as superannuation, investment bonds, family trusts and other structures, while designing tax-efficient strategies that deliver lasting benefits.

Russell’s research estimates advisers add around 1.2% per year through effective tax planning, but it can easily be so much more. Tax rules are complex and constantly shifting. Without expert guidance, it’s easy to misinterpret regulations and incur penalties. Skilled advisers help clients remain compliant while maximising after-tax wealth, a role that delivers measurable and enduring value.

Case study 3 – Sam

Sam’s salary is $85,000. If he sacrifices $5,000 to super, he will pay $750 in contributions tax instead of $1,600 in income tax, giving him $850 more to invest.

The emotional value of advice

To this point we have looked at the functional – quantifiable – value advice can add, measured in terms of its incremental impact on annual growth. But many would argue that the true benefits of advice are emotional, giving clients peace of mind, clarity, a sense of being in control.

The emotional benefits from advice have been extensively researched, with many common themes emerging. Research^[10] conducted by Coredata for IOOF (now Insignia) found an advice dividend in areas including:

• Peace of mind and reduced stress
  • 88% of advised clients said financial advice freed them from financial worries and stressors
  • 95% reported greater peace of mind financially
• Confidence and control
  • 92% felt greater control over their financial situation
  • 90% had greater confidence in making financial decisions
• Mental and physical health
  • One in two advised clients cited direct benefits to their mental health
  • Two in five reported benefits to their family life
  • Other cited improvements included social life and physical health.

Benefits were also identified in areas such as relationships, happiness, and overall life satisfaction.

The 2024 FAAA Value of Advice Index research^[11] found advised clients better off across metrics including Quality of Life, Financial Confidence, and Financial Satisfaction.

More recently Russell’s 2025 study^[12] found that advised clients reported the following benefits:

• 89% felt more confident and knowledgeable
• 86% felt more supported in lifestyle and values decisions
• 80% had peace of mind about their finances
• 86% had a structured plan for the future.

By contrast, unadvised clients were less confident, and 76% admitted they would feel more in control if they had expert advice.

Ranking the benefits – the VoA index

For advisers to be able optimally frame their value, it is crucial to understand what aspects of advice have the most impact on client satisfaction, and for this reason, Russell introduced a new metric to their annual study, the Value of an Adviser Index.

Not only does this show what clients value the most from the advice relationship, it also helps shine a light on any variations – or gaps – to what advisers believe clients value the most.

These satisfaction drivers were assessed against each other and then scored against a benchmark level of 100.

Russell found that in 2025, the top drivers of satisfaction were technical and emotional expertise (E) – with a score of 118 – and appropriate asset allocation (A) with a score of 113. These significantly outpaced tax‑savvy planning (T) at 92, behavioural coaching (B) at 91 and choices and trade‑offs (C) at 88.

Readers may be surprised to see that clients didn’t value behavioural coaching as highly as asset allocation, in contrast to its actual measurement which was found to be higher than both asset allocation and tax savvy planning. This variation perhaps reflects the fact that clients are unaware that the calm, reassuring messages, and the encouragement to ‘stay the course’ and ‘stick to the plan’ that their adviser gives them is indeed a form of coaching.

Alternatively, it could simply reflect the overconfidence seen in many amateur investors, who don’t believe they are susceptible to the flawed decision making and biases described earlier. This could explain why the Russell study also found that while 70% of advisers felt they added value by helping clients avoid costly mistakes during periods of market volatility, only 28% of clients recognised this benefit.

Trust and transparency – the bedrock of it all

Russell’s researchers (Honeycomb strategy) identified two dimensions of advice relationships that are the key enablers of advice value – dimensions which effectively unlock the 5-part VoA formula central to their study. These were Trust and Transparency.

Trust emerged as the single biggest driver of client satisfaction, outranking technical expertise and asset allocation.

Fee clarity is another area where perceptions diverge. Clients rate the importance of transparent, easy to understand fees at 8.2 out of 10 but rate advisers’ delivery in this area at 7.9 (advisers rate their own performance in this area at 8.4). Clearly explaining fees without jargon can strengthen trust and reinforce value. Taking time to walk clients through each cost, checking for understanding before moving on, and linking fees to outcomes can build confidence in the advice process.

Why trust matters

Trust is described in the VoA study as the ‘bedrock’ of the advice relationship, and there are many reasons trust is foundational to advice relationships. To the extent that a mistrust of financial advisers is a barrier to individuals seeking advice, then conversely, trust is essential to attracting and retaining clients.

The more information a client shares with their adviser, the more tailored and effective that advice is likely to be. Clients are likely to be more open and forthcoming when they trust their adviser, in contrast to the reservations identified by ASIC in their Rep 627 research:

“Some participants had reservations about providing personal information to someone who is essentially a stranger. A number of participants talked about ‘drip feeding’ or only partially sharing information with financial advisers, until they either built up sufficient trust, or as a means to retain a sense of control”.^[12]

Clients who trust their adviser are more likely to accept their recommendations, value their expertise, and respond positively to their coaching and reassurance during market turbulence. They are also more likely to refer/recommend that adviser to their friends and other family members.

Trust becomes even more crucial in certain client scenarios. Retirement is one such example, and indeed 40% of both advised clients and unadvised investors say it is the single biggest reason to seek advice¹⁴. When pre-retirees meet with an adviser for the very first time, it is likely that they are entrusting them with the largest asset they have outside of their home. Their retirement savings will underpin their quality of life for the next 30 years or more, so growing it and protecting it are crucial. Clients in these circumstances will understandably exhibit a higher degree of vigilance when choosing an adviser.

Trust isn’t one dimensional or organic. It’s not enough to simply ‘be trustworthy’. Trust needs to be systemised, built into your processes and communication. Building trust with different client segments requires different strategies and approaches. It is not a case of one-size-fits all. And it is hard won but easily lost, meaning it needs to be constantly worked at.

The next article in this series will take a more in depth look at trust and transparency as drivers of value in advice.

Conclusion

Financial advice delivers substantial and multifaceted value, both quantifiable and intangible. From the measurable uplift in portfolio performance through asset allocation, behavioural coaching, and tax-savvy strategies, to the life-shaping guidance advisers provide in navigating complex choices, the benefits of advice extend well beyond dollars and percentages. Just as importantly, there are emotional dividends, including peace of mind, confidence, and a sense of control, which underscore why advice is not merely a service, but an essential partnership in achieving life goals.

Ultimately, the foundation that unlocks the full spectrum of this value is trust. Trust fosters openness, strengthens the advice relationship, and enables advisers to guide clients through both financial and emotional uncertainties. For advisers, building and maintaining trust through transparency, empathy, and demonstrated expertise is not just a professional obligation, it is the bedrock of enduring client relationships and sustainable business success. As the profession continues to evolve, those who can effectively articulate, deliver, and reinforce the value of advice will be best positioned to grow, thrive, and make a meaningful difference in the financial and personal wellbeing of their clients.

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Read the full series:

• CPD: The advice value unlocked by trust – 5.6% and counting – Value of Advice (Part 1)
• CPD: Transparency and communication – making the value of advice visible (Part 2)
• CPD: Futureproof – what different generations really value in advice (Part 3)

———–

References:
[1] https://russellinvestments.com/content/ri/au/en-gb/financial-professional/tools-and-education/business-solutions/value-of-adviser
[2] https://www.finder.com.au/share-trading/financial-advice-statistics
[3] https://download.asic.gov.au/media/5243978/rep627-published-26-august-2019.pdf
[4] Ibid.
[5] https://morningstarinvestments.com.au/why-do-investors-break-up-with-their-financial-adviser/
[6] https://russellinvestments.com/content/ri/au/en-gb/financial-professional/tools-and-education/business-solutions/value-of-adviser
[7] https://faculty.haas.berkeley.edu/odean/Video%20Transcripts/Individual%20investors%20part%201%20heuristics.pdf
[8] https://www.vanguard.ca/content/dam/intl/americas/canada/en/documents/gas/quantifying-your-value-to-clients-adviser.pdf
[9] https://russellinvestments.com/content/ri/au/en-gb/financial-professional/tools-and-education/business-solutions/value-of-adviser
[10]https://www.bridges.com.au/content/dam/bridges/docs/the-true-value-of-advice-research-paper.pdf
[11] http://faaa.au/wp-content/uploads/2024/09/FAAA-Value-of-Advice-2024-Report.pdf
[12] https://russellinvestments.com/content/ri/au/en-gb/financial-professional/tools-and-education/business-solutions/value-of-adviser
[13] https://download.asic.gov.au/media/5243978/rep627-published-26-august-2019.pdf
[14] https://russellinvestments.com/content/ri/au/en-gb/financial-professional/tools-and-education/business-solutions/value-of-adviser

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Understanding investor behaviour can assist advisers in value-adding client management.

Investor behaviour cannot always be anticipated, particularly during periods of significant change and market volatility. More than ever, advisers are helping clients navigate the emotional side of their financial affairs as much as the technical aspects. This article, proudly sponsored by Russell Investments, examines the value of advice and within that, the importance of understanding investor behaviour.

A series of unexpected events over the past few years – COVID-19, the Ukraine war, US banking crisis, surging interest rates and inflation and now unrest in the Middle East – have tested nerves time and again as market volatility pushed the values of portfolios temporarily lower.

It is less than 20 years since the global financial crisis (GFC) rocked markets and its impact remains etched in the memories of many people. Advisers played an important role then and continue to do so; to ensure their clients understand that the GFC, COVID-19 and geopolitical unrest have proved that an investor with a properly constructed portfolio and a long term view can weather extreme periods of volatility.

These last three years have provided a clear demonstration of the importance of remaining invested through thick or thin. An investor who fled for the exits in mid-March 2020 when the pandemic emerged would have had a difficult time to find the best re-entry point, with no real market “dips” to take advantage of. This is where the value from your behavioural guidance shows up on the bottom line.

These lessons prove crucial in an environment during which official rates have risen from emergency lows to today’s 11-year high. Many investors are learning for the first time that high inflation erodes gains from cash investments to push real returns lower. Others are realising that bull markets don’t run forever.

What is behavioural finance?

Behavioural finance posits that rather than being rational and calculating, investors often make financial decisions based on emotions and cognitive biases^[1]. For example, a client may want to hold onto a loss-making investment rather than feeling the pain associated with taking a loss. Or, more commonly, a client may want to buy into an investment after a period of market exuberance, when the cycle has most likely peaked.

Much of traditional finance theory is predicated on rational investor behaviour that advocates the notion that financial markets are efficient. The efficient market hypothesis argues that current stock prices reflect all existing available information, making them fairly valued as they are presently^[2]. It also suggests that people are free from emotion and make rational decisions based on fact. However, behavioural finance would suggest this is not the case; instead it asserts that financial decisions around investments, income, risk and debt are influenced by human emotions, biases and cognitive limitations of the mind in processing and responding to information.

Key aspects of behavioural conditioning and how it relates to investment decision making are as follows:

Loss aversion is a cognitive bias that describes why, for individuals, the pain of losing is psychologically twice as powerful as the pleasure of gaining. The loss felt from money, or any other valuable object, can feel worse than gaining that same thing^[3]. For a client experiencing loss aversion, it’s better not to lose $50 than it is to find $50.

Herd mentality is defined by the Oxford Dictionary as “the tendency for people’s behaviour or beliefs to conform to those of the group to which they belong.” Herd mentality manifests in finance when investors follow the crowd instead of their own analysis. It has a history of starting large, unfounded market rallies and sell-offs that are often based on a lack of fundamental support to justify either^[4].

Confirmation bias describes the tendency for individuals to seek out and prefer information that supports their own pre-existing beliefs. Consequently, the individual then tends to ignore any information that contradicts those beliefs. Confirmation bias is often unintentional but can still lead to poor decision-making in real-life contexts^[5].

Recency bias is considered to be a cognitive error identified in behavioural economics whereby the individual incorrectly believes that recent events will recur in the near future. This tendency is irrational, as it obscures the true or objective probabilities of events occurring, leading the individual to make poor decisions.

Cycle of investor emotions

It’s a good time to revisit the Cycle of Investor Emotions (figure one). Recent market gyrations would have most investors fearful and anxious (in the green zone) – there are enough days with markets finishing in positive territory to temporarily buoy emotions, followed by sideways or a downward trajectory. Although there has been a lot of talk about an inflation driven bear market, it’s not following the expected path.

While unadvised investors may make rash decisions in this environment, an adviser can manage their clients’ emotions by explaining market cycles and how they might feel at different points. By educating clients, advisers can provide this ‘behavioural coaching’ to best position clients to ride out the vagaries of financial markets^[6].

Investors typically start with optimism, which sits at the inflection point on the emotional upswing. At this point, investors expect things to go their way, or they expect to receive a return for the risk of investing. Investors go into the markets because they believe they will be able to grow their wealth through their investment choices.

When markets move in the direction the investor had hoped to see, they start to get excited about the possibility of even greater gains. This is when investors start hearing positive news stories in the media, coupled with tips from friends and colleagues, stories about how well their investments have done can mean investors are spurred on. This can be an attractive comfort zone because in such a scenario, investors are running with the herd.

When the momentum continues, investors can find the experience thrilling and begin to anticipate even higher returns – and sometimes start sharing their own tips!

As markets reach the top of the cycle, investors may experience euphoria.

At this point, the uneducated investor starts to believe that they made a smart move to invest when they did and believe that the good times will continue unchecked. In some cases, investors fool themselves into believing they can tolerate higher levels of risk and may begin to trade more frequently or invest in riskier asset classes.

The second phase of the cycle occurs when the market starts to turn. At first, investors watch anxiously to see if the downturn is just a blip. They may believe that things will improve shortly and therefore hang on to their investments. They often try to shield themselves psychologically from the bad news and move into denial.

As the markets continue to fall, denial gives way to fear. Investment values decline perhaps even to the point that investors begin to see losses. Bad news stories proliferate in the media and online. When market losses accelerate, real fear kicks in. Some investors may then turn defensive and switch out of riskier equities to more defensive equities or other asset classes such as bonds.

In the third phase of the cycle, the realities of a bear market come to the fore and an investor may become depressed and desperate.

Investors who missed their chance to take profits may try to get their portfolio back into the black by either selling their worst-performing investments or moving into securities that don’t fit their risk profile. When that doesn’t work, panic sets in.

At this point, some investors feel at the mercy of the market and capitulate, pulling out altogether, abandoning investments at precisely the wrong time.

Those who remain invested may become despondent and wonder whether they should ever have invested their hard-earned money in the markets. Interestingly, this is the part of the cycle identified as the point of maximum financial opportunity.

In the fourth phase of the cycle, investors may experience some scepticism when markets start to rise. They often have a sense of caution or worry, wondering if market growth will last.

Though investors are hopeful about continued market increases, they may be reluctant to invest money—even at a point when prices are still relatively low and opportunities are attractive.

Eventually investors come to realise the market is recovering. For those investors who let their emotions rule their investment decisions, the market cycle can begin all over again – unless of course they have good financial advice and understand the cyclicality of the market and the importance of staying the course in the asset allocation recommended by their adviser.

Inflation magnifies indecision

Consider the journey of four hypothetical investors who each invested $100 in January 2020 but reacted differently to the market downturn triggered by COVID-19 in March that year (figure two).

• Fiona remained in the market and witnessed her $100 investment rise to $125 by June 2023 (blue line in the chart below).
• Muhammad instead moved to cash in March 2020 after his $100 fell to $87, re-entering the market three months later. His ultimate investment was worth $112 in June 2023 (orange line in the chart below).
• Paloma also moved to cash in March 2020 but waited until the following New Year to re-enter the market. Her investment was worth $101 in June this year (grey line in the chart below).
• Craig was worse off still – he also bailed into cash in March 2020 and has never re-entered it. The $87 he initially moved to cash is now worth just $78 in real terms due to the impact of inflation.

As figure three illustrates, missing out on even a handful of the market’s best days can have a real impact on the amount of capital that someone can accumulate over time. This counterintuitive result occurs because markets, while unpredictable, have a history of rising over the long term^[7].

In fact, investors who remained invested in the S&P/ASX300 Total Return Index throughout the past 10 years built significantly more capital than those who missed just the 10 best days’ performance of the index in that period.

And those who missed the best 20 days wound up more than 50% worse off than if they had remained invested for the full decade.

Without the guidance of advisers, investors can fall into the trap of buying when markets are bullish and selling when sentiment turns bearish. There is real value in the ability of advisers to help clients maintain their long-term strategies in the face of unnerving volatility.

In another example, calculations show that regularly increasing or decreasing exposure to the US S&P500 Index might have cost investors as much as 3.39% in returns in the 20 years to June 2023.

Advisers who forge solid relationships with clients are best placed to convince them of the merits of maintaining the positions that underpin the financial strategies they formulate on their behalf.

Why advisers need to understand investor behaviour

There are several reasons an adviser and their clients will benefit from a good understanding of investor behaviour. These include:

• Tailored recommendations: clients have different risk tolerances, financial goals and objectives and preferences. Understanding investor behaviour allows advisers to tailor recommendations to align with the client’s individual needs.
• Risk Management: investor behaviour can be influenced by emotions such as fear, greed and overconfidence. By understanding these tendencies, advisers can help their clients to avoid impulsive or emotionally driven decisions that may lead to poor outcomes.
• Long-term success: an understanding of investor behaviour helps advisers to guide their clients towards strategies that are more likely to lead to long-term success; this includes remaining committed to their investment plan through periods of market volatility.
• Avoiding common pitfalls: being aware of common behavioural biases such as herd mentality, confirmation bias, loss aversion and recency bias allows an adviser to recognise when a client might be making decisions based on flawed thinking. They can then provide guidance to alleviate these biases.
• Communication and trust: by understanding how clients perceive and react to financial information and market events is critical for effective communication. An adviser who truly understands investor behaviour and its drivers can explain complex concepts in a way that resonates with the client, building trust in the process.
• Managing expectations: investor behaviour often includes unrealistic expectations about returns or the ability to time the market; an adviser can help set realistic expectations and educate clients.
• Emotional support: investing can be an emotional journey, especially during times of market volatility. An adviser who understands investor behaviour and the cycle of investor emotions can provide emotional support and act as a steadying influence for the client. That way, rash decisions driven by exuberance, fear or panic can be avoided.

An adviser who understands investor behaviour is better equipped to provide holistic financial advice that considers not only the financial aspects of advice, but also the emotional and psychological dimensions of investing. This leads to a successful and truly valuable client-adviser relationship.

Notes:
[1] Investopedia, https://www.investopedia.com/articles/02/112502.asp
[2] Forbes https://www.forbes.com/advisor/investing/efficient-market-hypothesis/
[3] Kahneman, D., & Tversky, A. (1977). Prospect Theory. An Analysis of Decision Making Under Risk. doi:10.21236/ada045771
[4] Investopedia https://www.investopedia.com/terms/h/herdinstinct.asp
[5] Scribbr https://www.scribbr.com/research-bias/confirmation-bias/
[6] Investopedia https://www.investopedia.com/recency-availability-bias-5206686
[7] Russell Investments https://russellinvestments.com/us/blog/bulls-vs-bears-2

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