The last two years has been a challenging environment for investors and financial advisers, but despite these ongoing challenges and pressures, statistics in 2022 show 87% of Kiwi’s are satisfied with their advisers’ services and the value of advisers is approximately 4.3%, clearly showing the total value of services is substantially higher than any typical advice fee.

In the last two years as the market transitioned from growth to value, the need for advice and reassurance is greater than ever despite people reassessing aspects of their lives especially after things like the ‘Big Quit’ that resulted in sustained migration out of cities to regional communities and the implementation of longer term work from home or hybrid working arrangements.

Along with rising interest rates and general cost of living, more people have been taking the time out to take stock of what their new ‘normal’ will be.

Through the ups and down, Russell Investments believes financial advisers provide valuable assistance, helping clients through those transitions, reviewing their evolving goals, needs and circumstances, in person and now, virtually.

Although outlooks and priorities have changed as a result of the pandemic, advisers have remained constant, ensuring clients were engaged and ready to take actions with intent and purpose, providing a sense of true value.

Russell Investments believes that with that true value, the following easy to remember formula highlights this value- A+B+C+E

A IS FOR APPROPRIATE ASSET ALLOCATION.

Research shows that 85% of asset allocation drives investment outcomes for a client, but also how that individual has invested has a huge impact on achieving investment outcomes. Often, this is a critical step of an advice process that is undervalued and underappreciated.
So what does that really mean?

Asset allocation is the foundation of successful advice. In a superannuation environment there are generally two types of non- advised investors. Those who are disengaged are defaulted into a one size fits all allocation with limited or no reference to their needs or personal circumstances.

On the other side, engaged investors- many who build their own portfolios come with their own risk.

For example, a disengaged superannuation investor in a default KiwiSaver scheme, no matter the age, current super balance or retirement goal, is invested the same way as everyone else despite $87 billion of assets in the various KiwiSaver investment options and $2 billion of these assets managed within the default scheme.

In a hypothetical portfolio based on those factors- age, investment goals, current superannuation balance and preferences, a financial adviser recommends a portfolio with 90% in growth assets. That hypothetical 90% growth asset has delivered an annualised return of 7.14% annually.

Compared to a default KiwiSaver option with only 60% growth assets, the individual’s return would have been 6.4% p.a. The individual would have been better off by 1.4% annually having a portfolio with a more appropriate asset allocation for their particular needs. Based on an initial balance of $100,000, after 20 years, the individual would have a balance of $454,625 compared to $348,167 in investing in the default scheme.

The risk and reward of appropriate asset allocation is not just about maximizing returns but managing the risk. Risk means volatility and is often the cause of investors doubting their investment plans and pulling money out of the market.

For many investors, 2020 was the first year of ongoing volatility with significant market drops. Although that dampened somewhat in 202, it re-emerged in 2022 and has shown a clear demonstration of the importance of remaining invested through thick and thin. When the pandemic emerged it was a difficult time to find the best re entry point with no real market ‘dips’ to take advantage of, however this is where the second formula comes into play.

B IS FOR BEHAVIORAL COACHING

Fear impacts opportunity.

Take for example another hypothetical investors’ journey from January 2020 to 30 June 2022.

Investors who remained in the market for the full time period would have seen a $100 investment rise to $112, compared to an investor who moved to cash in March 2020 and then returned to the market a few months later at the end of the second quarter only have $98 at the end point (orange line in the chart below).

An investor who moved to cash in March 2020 and remained in cash for the entire year, then re-entered the market at the beginning of 2021, would have only $91 at the end point (gray line in the chart below).

The takeaway- When abandoning an investment plan due to fear and pulling out of the market when it is volatile can cause losses and could lead to missing out on a period of sustained increases and making it hard to time the perfect point to re enter the market.

As the graph shows, missing out on even a few good days of performance can have a detrimental effect on an investors ‘portfolio.

Without advisers’ guidance a common problem is investors buying into markets when it is euphoric and selling when share prices fall. With advisers, the ability to help investors stick to their long-term financial plan aids that sense of value and can help avoid those behavioral mistakes when the market is at its best.

C IS FOR CHOICES AND TRADEOFFS- Variable

Advisers can provide a wealth management approach throughout an investor’s financial life. As most people’s lives inevitably become more complex, advisers should incorporate a personalized strategy that helps to achieve investors’ goals.

Every set of investors’ circumstances- key events like careers, weddings, buying a home. Preferences- reduce or increase investment risk, portfolio construction. Considerations- rising inflation, rising interest rates, market volatility are all unique, with increases in volume and complexity that comes with age, needs and experiences.

Often, the knowledge required to understand these implications can lead to adviser fatigue, increasing poor decision outcomes.

By implementing a strategy to evaluate and prioritize these decisions, advisers can maximize the outcomes of these choices and tradeoffs can be invaluable.

E IS FOR EXPERTISE= PRICELESS

Managing wealth in the New Zealand financial system is complex at the best of times and navigating the various requirements of things like superannuation, taxation, insurances and the legal aspects can be challenging for most investors with roughly 44% of Kiwis financially literate.

In challenging times they can add value through cases of financial crisis, trauma, illness and death. This unique combination is technical and emotional expertise and a priceless form of value with an average of 74% of advised Kiwi’s agreeing that using a financial adviser helped them achieve better overall outcomes in their lives and 78% receiving advice agreeing gives them the peace of mind.

In the best and worst of times, advisers providing investors with both the technical and emotional expertise is critical to achieve lifelong goals, successful relationships and providing the best outcomes.