... 'cusp of a generational regulatory change' with the Future of Financial Advice (FOFA) reforms. Over the years, astute investors have become smarter in the way that they make the most of their advisers' skills and experience. And perhaps the imminent regulatory changes may encourage for more investors to rethink their relationship with their advisers. Almost two years ago, Vanguard in the US published a valuable paper, Advisor's Alpha , that looked at ways that good advisers can add value for their clients in ways that have nothing to do with trying to out-perform the market. The paper's authors, Vanguard investment strategists and analysts Donald Bennyhoff and Francis Kinniry, wrote: "No matter how skilled the adviser, the path to better investment results may not lie with the ability to pick investments or strategies." "Instead," Bennyhoff and Kinniry said, "advisers should consider a new value proposition based on alternative skills and expertise: that is, they should act as wealth managers and behavioural coaches, providing discipline and experience to investors who need it." "On their own, investors often lack both understanding and discipline, allowing themselves to be swayed by headlines and advertisements surrounding the 'investment du jour' - and thus often achieving wealth destruction rather than creation." The analysts wrote that an adviser's alpha (added value) target might be to improve an investor's returns in ways that don't depend on market out-performance: asset allocation, rebalancing a portfolio, tax-efficient investment strategies and cash-flow management. And sometimes value is added by simply advising clients to do nothing, depending upon the circumstances. "Advisers, as behavioural coaches, can act as emotional circuit-breakers in bull or bear markets by circumventing their clients' tendencies to chase returns or run for cover in emotionally charged markets," Bennyhoff and Kinniry commented. It is perhaps surprising that many people are willing to pay for personal fitness trainers yet are reluctant to pay financial planners to act as their wealth managers and behavioural coaches.
By Robin Bowerman
Smart Investing
Principal & Head of Retail, Vanguard Investments Australia
2nd November 2012
29th-November-2012 | 