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By Suzean Haumann*
The current volatile market situation and uncertain economic scenario have many an investor ill at ease, panic-stricken even.
When sudden unprecedented events occur like the outbreak of the COVID-19 pandemic, causing major market upheaval, the first thought that usually comes to mind is that one is heading towards immediate financial ruin, and that will probably be followed by a knee jerk reaction to try and stop that from happening.
But both experience and research show that emotion and markets don’t mix, especially in the short-term.
It is therefore more imperative than ever to engage with an independent financial advisor for unbiased guidance to ensure better portfolio performance over the longer term and help investors to responsibly navigate difficult times.
Seeking advice from a reputable source to explore the investment options that are available starts with contacting an authorised financial professional accredited with the Financial Services Conduct Authority (FSCA), who will then unpack an individual’s current stance of things and put together his/her unique future financial plan.
But it remains commonplace for the thought process in time of costly crisis, to include the question: ‘why on earth should I hire someone to manage my own money when I already have a pension fund and there is enough information and advice available in the public domain to make informed decisions on other investments?’
It’s true. Financial information is available absolutely everywhere. Every financial services institution – from banks to asset managers, insurers, economic research companies and industry bodies like ASISA produce data and details on products, providers, planning and pitfalls on a continuous basis.
And financial advice does typically cost between 0.5% to 1% of a portfolio each year, according to research. So, yes, it’s normal for people to want to know if they are getting what they pay for.
However, Vanguard, one of the world’s largest investment companies has been examining this question for 15 years. Based on their research, analysis, and testing, there is a quantifiable increase in return from working with a financial advisor.
Vanguard calls this advantage the Advisor’s Alpha – in their words ‘the active return’. Vanguard’s research states that when certain best practices are followed, the result can be an active return in the 3% per year range.
Separate studies have come to similar conclusions.
And truth be told, not everyone wants or needs a financial advisor. About one-quarter of private investors are truly “self-directed,” according to Vanguard. These people truly enjoy investing and are pretty good at it.
“They obsessively follow the markets and enjoy creating and doing financial projections. Perhaps most importantly, these investors have an incredible level of discipline that prevents their emotions from intervening with their long-term investment strategy,” the investment firm states.
However, given that the majority of us aren’t “self-directed” – in South Africa and around the world – when it comes to money, even our own, it’s good to know that there is professional and experience help available that one can rely on, and which has proved to pay off over the longer term.
There are several ways in which a financial advisor can add value to investment efforts. Amongst these benefits are guidance on developing an overall investment strategy, asset allocation, minimising taxes, rebalancing portfolios, and sufficiently structuring withdrawals at the time of retirement. In the bigger scheme of things, each of these services can incrementally boost an investor’s rewards.
But probably the single biggest way a financial advisor can add value is through what is called behavioural coaching.
Supportive financial advisors can keep investors’ fears and emotions in check by providing steady, fact-based advice and reassurance when the markets go crazy.
Global investment advisory firm, Morningstar conducted a study, which showed that investors often receive far lower returns than the very funds they invest in.
The reason: they run to funds after they have done well and sell other funds right before they take off. In other words, they sell low and buy high. An advisor can prevent such counterproductive behaviours.
In a nutshell, financial advice has many dimensions including portfolio value from building a well-diversified portfolio that generates better after-tax risk-adjusted returns net of all fees, suitably matched to the investor’s risk tolerance.
The second dimension assesses an investor’s ability to achieve the desired goal as an investment portfolio does not stand on its own. It is in service to one or more financial goals, such as retirement, wealth-creating, estate planning, education funding, and cash reserves.
Financial advisors are of great value to assist investors to take the emotion out of financial decisions and to ensure financial well-being and/or peace of mind. The value of advice cannot be assessed by purely quantitative measures. It also has a subjective or qualitative aspect based on the investor’s emotional relationship with the advisor and his/her savings.
Underlying elements include trust, the investor’s own sense of confidence, the investor’s perception of success or accomplishment in financial affairs, and the nature of financial handholding in periods of market volatility. In addition, financial advisors offer a range of services related to personal finance, not only investing. These include risk management and fiduciary services, aspects of an overall plan often ignored or not updated as circumstances change.
Managing emotions is especially hard during times of extreme market volatility such as the world is experiencing now. The value of engaging an advisor is proven over the long term. Astute investors understand that daily market changes can have -sometimes dramatic – negative impacts on portfolios and that this is beyond the control of an advisor.
- Suzean Haumann is a Certified Financial Planner® and a registered member of the Financial Planning Institute of South Africa. She has experience in various aspects of financial planning, focusing on investment and retirement planning as well offshore investments. She also serves as a Foreign Exchange Consultant for Brenthurst Wealth.
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