Picture: ISTOCK
Picture: ISTOCK

When you hire a financial adviser, he or she should ensure you earn the highest returns on your investments, right?

Not according to financial advisers, who believe their best offering is coaching you to make the right decisions, according to an international study on what investors and advisers value most when it comes to financial advice.

The study, by global investment research and management company Morningstar, found that advisers rank behavioural coaching as the single most effective service they can offer, but investors think little of the service, Ryan Murphy, head of decision sciences at Morningstar Investment Management, told the company's recent investment conference in Cape Town and Johannesburg.

Advisers see the value of their coaching when investors avoid common behavioural mistakes typically made when they react emotionally and panic-sell in a market downturn or buy high when markets are booming, says Murphy.

On the other hand, investors ranked "Helps me stay in control of my emotions" last out of 15 options on what they value most when selecting an adviser.

The importance of the behavioural coaching was not the only disconnect between investors and advisers, with investors ranking "Can help me maximise my returns" in fourth position on the list whereas advisers ranked this service second last.

Investors say maximising returns is a key part of the value of advice, whereas advisers think investors value personalisation and portfolios tailored to their unique needs.

This shouldn't surprise anyone, says Murphy. For years, professional financial advice was promoted as a way to beat the market, and even though financial and investing professionals might understand that this isn't the case, changing the "returns first" perception won't happen overnight.

Advisers' emphasis on personalisation is in line with research that advocates new approaches to investing, such as goals-based investing, which can
result in 15% more wealth for investors, says Murphy.

Research by Vanguard, one of the world's largest investment management companies, defines three areas in which advisers deliver value: portfolio construction, including diversification strategies, asset allocation, the impact of taxes and portfolio fees; financial value, which assesses an investor's ability to achieve a desired goal; and emotional value, which includes behavioural coaching.

"The value of advice has traditionally been focused on portfolio outcomes, but as our new framework illustrates, a broad definition including financial and emotional outcomes, provides a more comprehensive assessment of advice's true value," says Steve Utkus, global head of investors research for Vanguard Investment Group and co-author of a recently released Vanguard paper entitled "New Framework for Assessing the Value of Financial Advice".

It's easy to look at the Morningstar results and think that investors are just behind the times, says Murphy, but it shows that investors have internalised the industry's past tendency to overemphasise returns and performance relative to a benchmark.

"The disconnect between the expectations of investors and what advisers think investors value from a financial adviser creates problems on both sides of the relationship," he says.

For advisers, it's hard to build a mutually beneficial relationship if you don't understand the value of the advice you receive.

And it can be frustrating for you if it seems that your adviser isn't meeting your expectations, he says.

The interpersonal side of advice, which includes personalisation and behavioural coaching, can be the most valuable aspect of professional advice, and the industry needs to articulate that better.

Returns aren't the be-all and end-all, says Murphy. Modern advice is more coaching than stock-picking, and the short-term returns are only part of the
picture.

The emergence of online investment services that use computer algorithms to provide financial advice for a low or zero fee has prompted some investors to question the value of personalised financial advice offered by human advisers, says US wealth advisory firm Merrill (formerly Merrill Lynch) in a paper titled "The Value of Personal Financial Advice".

According to the paper, for many investors, financial advice can add value of up to 2% to 3% before fees (advisory fees, account fees, management fees, commissions, trading fees, brokerage fees, etcetera).

These fees will have an impact on an investor's potential returns and will cause them to be lower than if these fees had not been incurred.

Self-directed investing or online investment advice may be a good fit for knowledgeable, disciplined investors. But for those who lack the knowledge or self-discipline to implement a goals-based process, hiring a skilled adviser can add value, says the research paper.