We’re Not Worthy?

The purists in the industry are talking more and more about the notion of value-based advice fees – the idea of charging clients as a proportion of the ‘value-add’ the advice you give can add.

The concept is essentially the same as fee-for-service, but specifically that a client is able to appreciate the value being added by their adviser.

It could be, for example, saving a client a large sum of money that would otherwise be lost to the tax man.

In reality the concept is difficult for advisers to incorporate as many of the benefits of having a professional planner are more indefinable.

Providing clients with comfort so they can sleep at night, preventing them from making bad investment decisions or educating them as to the level of risk they are taking on are hard to price.

To adapt an old adage, value is in the eye of the receiver.

Without wanting to get into the drawn out debate of the merits of commission or fee-based advice fees, the practicalities of adopting a pure value-based advice offer mean many businesses will struggle to move to the pure fee-based models that so many are calling for in the industry.

For clients who take investment advice from advisers, the unfortunate reality – no matter how strong your value proposition or service offering is – is that market performance is in some way, shape or form, linked to the perceived value of the advice given.

Therefore when markets go backwards more than 30% as they have done recently, is that value-based pricing is even more difficult to incorporate.

On another note, it’s going to take time to judge the effects of the recent global financial turmoil on the psyche of the average retail investor.

However it would not be surprising if many investors are not reappraising their view of various asset classes.

Equities, for example, are usually seen as the best asset class to beat inflation and for long-term growth.

But whereas advisers used to talk of equities as being an investment for at least five years, this time frame could now become 10 to 15 years.

After all, the recent plunge in global share markets, in many instances, has wiped out the gains of the last five years.

The prognosticators are suggesting the future is going to look an awful lot different to what we have become used to in the investment world over the past several years.

Therefore at a time when advisers are being challenged to provide value to clients, perhaps more tweaks are needed in the product development arena?

What is clear is that the credit crunch has uncovered how much many investors are simply holding in cash.

However with inflation a mere 1% below the RBA cash rate, this seems a short-sighted approach, yet many investors are too worried to go back into the markets.

For those determined to stay in cash, the security of the institutions they invest with could be as important as the headline rate of interest.

Gold is traditionally seen as the safest of havens in times of market turbulence and in the UK, a provider of exchange-traded notes investing in gold reported inflows of US$200m in two weeks in September.

In order to satisfy the security cravings of the ‘gold bugs’ it offers allocations of bullion, so investors know there are gold bars held in a vault to back their investment contract.

At present gold is seen as the refuge of the ultra-cautious, but after seeing major banks teetering on the brink of collapse, perhaps more investors will want to hold gold and other precious metals?

As well as altering views on certain asset classes, we should expect to see other changes.

One possibility is the return of the partnership structure in areas such as investment banking.

Many trading firms moved away from this structure in order to access more capital, but with lower levels of leverage, this might be less important in the future.

There is also a very strong case for arguing that partners in a business had a greater interest in its long-term survival than executives in a listed company, who were more focussed on next year’s bonus payments.

It would be nice to think that mutuality could make a return, but it is extremely unlikely. Many building societies that operated for years as stable, long-term institutions have floundered in the wider market economy.

An important lesson could be that diversification should not just apply to investors’ portfolios, but also to the range of institutions and business models operating in the financial system itself.

The article appeared in the latest edition of IFA Magazine.