Why you need an advisor
Why you need an adviser
In a world where Google can provide the answer to just about any question in a matter of seconds, it can be tempting to believe that you don’t need financial advice and you certainly don’t need a financial adviser. After all, if costs matter shouldn’t you save by doing it yourself?
It’s never been easier to invest, and it’s never been cheaper, but just because you have the power to trade in the palm of your hand doesn’t mean you should or that it’s a good idea.
Professional advice has never been more critical or more accessible. Here's why you shouldn’t invest without it.
Research shows advisers add value
The truth is that much of the advice you read online or in the media is positively harmful for you and your investments.
The weight of academic and industry research shows that the right advisor not only delivers peace of mind, but they also add about 3% a year to your net investment returns. Over your lifetime, that added value can make a massive difference.
Even Vanguard, who you might expect to be on the side of the individual investor, agrees that advisers add material value. They call this the advisers alpha-(that’s industry jargon for added value).
The most obvious source of this added value is choosing the right asset allocation for your risk tolerance, circumstances, goal, and time horizon.
Investor's earn their return from the amount of risk they take, and the goal is to maximise the return for any given level of risk.
Everyone’s attitude to risk, and their ability to deal with it is different. Your advisor will identify the right amount of risk for you and then to build a portfolio that strikes the right balance between riskier assets (like shares and real estate) and less risky ones (like bonds or cash).
Your advisor will also ensure that your portfolio is sufficiently diversified. Diversification is the only free lunch when it comes to investing, but it's not just about the number of things you invest in – it's about how they behave relative to each other. It is this different behaviour (correlation) that yields the benefits.
You can’t control markets, but you can manage your costs. A good advisor will focus on keeping control of your expenses.
Research has repeatedly shown that low-cost funds (mostly indexed) outperform higher-cost alternatives. It’s the net return that matters - other words the returns you keep for yourself.
The returns you get to spend (the net return) is the gross return less costs and taxes. These costs compound over time. An advisor who keeps those costs to a minimum will help you to reap considerable rewards over the long term.
Finding some of these costs takes a trained eye, and the funds management industry is highly skilled at hiding them.
Every time you trade (or your fund manager trades), there are tax implications. Lower turnover not only reduces transaction costs, it also reduces or defers taxes.
Some indexes have more movement than others. Some are more liquid than others. Low liquidity and high turnover in the constituents can add materially to your costs. Your advisor can help by identifying the right index to match your recommended asset allocation with this in mind.
Ongoing Management is where the magic happens.
If selecting the right portfolio when you start investing is the foundation of your plan, then having a professional keeping an eye on it over time is critical.
Most people would be aware that over time the relative split between each investment will drift from your target as a result of market movements. Your adviser will monitor this and, when appropriate, make recommendations to return your balances to the target allocation.
But other changes can be less obvious and harder to track. Markets change, regulation changes, managers change, investment styles change, funds change the index they track and your circumstances may change. All of these events may require a modification to your asset allocation or choice of fund.
Choosing ongoing management ensures that these are all considered at the appropriate time and actioned in a way that is consistent with your goals, and takes into account costs and taxes.
And of course, your goals and circumstances change. Marriage, divorce, birth of a child, death of a parent, change of job or income are all things that could change your financial plan. Your advisor will prompt you to discuss these and amend your plan accordingly.
Finally, managing your behaviour and reactions to market conditions.
Even the most seasoned investor can struggle to stick with the plan in turbulent markets. At some stage, most investors let their emotions get the better of them and make bad money decisions.
Many succumb to the allure of the latest fad or fashion which almost always ends badly.
The truth is that individual investors generally do worse than the funds they invest in.
That’s because they buy when markets are hot and bail out when markets are gloomy. Your financial advisor will more than repay their fees by preventing you from doing this.
So how do I choose an adviser
Start with the basics. Make sure they are appropriately licenced and not aligned with your bank or super fund.
Look for someone who specialises in people like you. If you are retired, you need someone who knows Centrelink, aged care and income streams. But if you are younger, you need someone who focuses on the unique needs of young Australians.
You need an advisor that you're comfortable dealing with. Are they available when you need them? This will be a long-term working relationship.
Your investments are important, but a good financial advisor isn’t just an investment advisor. You should expect your advisor to spend their time with you wisely. Here’s how we spend our time at Life Sherpa.
- 20% Listening to you to understanding what matters to you
- 20% Building your unique Life Sherpa plan based on what we learn – 20%
- Being there for you for as long as you need us, to help you stick with your plan, allay your fears and remind you that you’re playing the long game – 50%
- Checking that you genuinely understand why your plan is right for you – 10%
- Making guesses or predicting what markets will do or identifying the ‘next big thing’ – 0%