The value of strategic advice

Lately, everywhere you look there is talk of self-service portfolio construction tools, investors being able to build well-diversified investment portfolios without much human intervention, and the role of the financial planner becoming obsolete due to technological developments.

Some of these innovative product and service models claim their effectiveness through cost reduction, in addition to simplicity of use, heedlessly implying that cost reduction alone can lead to superior outcomes for investors. Some of these models can encourage people to become DIY investors and inadvertently undermine the role of planning and strategies towards broader wealth creation.

Investment outperformance, whilst being a worthwhile endeavour for any investor, should not be considered a self-sufficing goal in itself. Creating enough wealth and assets that provide the required level of income to sustain living expenses for when the ability to earn a linear income becomes extinct, should absolutely be a financial objective that every investor strives for.

Therefore, it is important that investment performance not be considered outside the context of, and in isolation, from wealth creation objectives. This is where the business and product models being advocated by the self-service proponents of DIY portfolio construction tools, are deficient and their associated implied claims of investment performance resulting in total wealth creation is suppositious.

It is absolutely true that excessive and unnecessary platform and product fees (whether active management or not) can erode returns. However, the notion that fees are the overwhelming driver of investment performance (and therefore total wealth creation) will depend on whether the planner is adding additional value through strategies that enhance returns and go beyond fund/product selection.

Strategies such as dollar cost averaging, increasing exposure to quality assets, instalment gearing (where appropriate), re-balancing, buying during market downturns, debt recycling and staying the course, are areas where planners can add significant value.

For those planners who do not add strategic value through the adoption of these and other strategies, product selection becomes paramount and it makes it increasingly difficult for those planners to justify platform, fund or active management fees and unquestionably, planner fee in the context of value creation.

The concept that investors can create wealth through product selection alone, without the strategic input and counsel of a competent financial planner, is utter nonsense, as not only does it largely ignore strategy adoption but it also fails to account for some of the biggest determinants of successful investing – discipline and behavioural aspects, and counter-balancing the common biases that exist in most investors’ minds.

What is the point of investment performance (regardless of whether the investment performance is achieved through outperforming a benchmark or reducing the cost of investing) if the client does not meet their objectives of having enough income to last a lifetime or another worthwhile stated goal?

The issue is that claims being made by the innovators of new portfolio construction tools sometimes only provide a unilateral view by relating investment performance to product selection only. The returns do not just come through selecting products – whether they are index or active. Their claims neglect to highlight the broader strategic value provided by financial planners, in regards to investment outcomes through the application of strategic advice and behaviour modification around dissuasion from the common psychological biases, such as over confidence, basing decisions on familiar or recent events and loss aversion.

Plus, the talk about returns on a particular investment or a portfolio is largely irrelevant if a client still does not achieve their objective despite reduced fees on a fund.

Don’t get me wrong, I am personally all for passive investing and anything that reduces investment costs. However, I will only consider myself successful as a planner if a client achieves their financial objectives through my advice or I can help them reduce the gap between their current situation and their financial destination, as opposed to simply saving them on a fund cost (which I would do anyway).

Investors or planners picking product or portfolio solutions without the incorporation of strategic advice, is really no different to selecting ingredients without a recipe.

Anyone can buy a property, shares or construct a portfolio, but very few achieve the rare goal of producing enough assets that produces an income that lasts an entire lifetime.

Product shortcomings and their criticism should not be used to undermine the value of strategic advice and competent financial planning, which subsumes the importance of emotions and strategies when it comes to successful wealth creation.

Ron Malhotra AFP® is the Managing Director and Wealth Planner of Maple Tree Wealth Management.