The value of wise counsel is in the confidence of having someone knowledgeable watch your back, writes Nick Stewart.
Nick Stewart is a financial adviser and CEO at Stewart Group.
There’s something delightfully absurd about reducing the value of financial advice to 4.52%.
Not 4.5%, mind you, but 4.52% – as if those two decimal places represent some profound mathematical certainty rather than being theatrical gravitas. Russell Investments’ latest attempt to quantify the worth of financial advisers deserves credit for its ambition at least.
The report tries to answer a deceptively simple question: What exactly are we paying for when we hire someone to tell us what to do with our money?
Answer: It’s mostly paying someone to stop us from being idiots and getting caught up in the moment.
The expensive art of doing nothing
Russell’s methodology reveals something about investor behaviour. The bulk of the 4.52% value – a whopping 3.57% – comes from what the industry politely calls “behavioural coaching”.
Translation: advisers earn their keep primarily by preventing clients from panicking when markets wobble.
Most of us are temperamentally unsuited to managing our own wealth. We’re brilliant at buying high and selling low, at mistaking noise for signal, at confusing a rough week with financial apocalypse. Then we miss out – and investors who missed the 10 best trading days over the past decade underperformed the faithful by 3.57% annually. Miss the best 40 days, and you’re 60% worse off.
New Zealanders have a behavioural pattern. The 1987 sharemarket crash created a generation-long aversion to equities that arguably cost investors more than the crash itself. Fast forward to 2021, and we’d simply changed asset classes – the residential property market’s decline caught out leveraged investors who’d been assured bricks and mortar were different and safer.
The value of advice lies primarily in having someone prevent us from checking our portfolio balance during such market turbulence and doing something catastrophically stupid about it.
What the spreadsheet misses
Russell tosses in another 0.95% for technical services like risk profiling and wealth planning, then declares the rest “priceless” – admirably honest, or a way of saying “we can’t measure this”.
Here’s what it fails to capture: tax efficiency alone dwarfs that 4.52% in any given year. Asset protection preventing a lawsuit or relationship breakdown from wiping out everything you’ve built? Not included in the report, but infinitely valuable. Succession planning, risk management, helping you achieve life goals rather than just portfolio benchmarks? None of this shows up in Russell’s investment-centric calculations.
Access and transparency
If advice is worth 4.52% and advisers typically charge around 1%, it looks like excellent value. Except, most people lack sufficient wealth to make the relationship worthwhile for the adviser.
The industry has created a product that works brilliantly for those who need it least. Governments have tried fixes – banning commissions, mandating transparency – with mixed results. New Zealand continues to wrestle with how to make advice affordable, particularly in KiwiSaver and insurance where commissions remain influential.
Perhaps the most valuable insight comes from the Brokers Ireland whitepaper released alongside Russell’s report. Its conclusion is straightforward: transparency builds trust. When clients understand how advisers are paid and believe the advice isn’t product-driven, they’re more inclined to see it as genuinely serving their interests.
It seems the financial advice industry has spent decades learning what every other profession figured out ages ago: people trust you more when they can see you’re not primarily trying to sell them something.
Enter fee-only fiduciary advisers, paid solely by clients rather than through product commissions. Their only incentive is the client’s long-term financial health, which leads to hard truths at times.
The real value
Financial advice is probably worth more than we think, and less than advisers would like us to believe.
The 4.52% is simultaneously too precise and not precise enough – a number playing at objectivity while measuring something fundamentally subjective.
The value of wise counsel isn’t found in Russell’s spreadsheets. It’s in the confidence of having someone knowledgeable watch your back, the relief of outsourcing worry to someone who can’t profit from your fear, and the security of having someone stop you doing something silly with your retirement savings.
That might not work out to exactly 4.52%. How much depends less on the arithmetic, and more on what peace of mind is worth to you.