Risk Management

Two sides of the investment risk coin

Will volatility and technology turn clients away from advisers? The insurer’s view

By: Henry van Deventer, Head of Wealth Development at Old Mutual Wealth


The last few years have given investors plenty of reason to reconsider whether their investment strategies – and their financial advisers – are still effective and relevant.

The global financial crisis caused years of low and volatile returns leaving many investors feeling disillusioned, despondent and doubtful as to whether financial advisers are still worth their keep.

To compound the challenges faced by advisers, we are also living in an age where investments have become cheap and accessible through the internet and mobile apps, referred to as ‘robo-advice’. The next few years will also see the introduction of new regulation outlined in the Retail Distribution Review (RDR) White Paper.

From a remuneration perspective, commissions and rebates on investments will be abolished, and the up-front commissions on assurance products will be reduced by roughly half. This means that advisers will need to increase their advice fees and funds under advice to maintain their income.

At a time when clients are arguably seeing less value and more alternatives in financial advice than ever before, this is a big ask. When we combine these challenges, we can potentially see the making of a perfect storm that could wreak havoc on the future of investment advisers.

The reality is that the need for sound financial advice in these volatile times is more important than ever before. And, interestingly, a study by Old Mutual Wealth has shown that clients that benefit from good financial advice are significantly better off than those without advisers. The reasons for this include:

  • Statistically, clients in volatile markets are much more prone to withdraw their money from longterm, high-growth asset classes in favour of the ‘safety’ of nonvolatile, fixed-interest investments. In the last five years, investors in South African balanced funds have underperformed their benchmarks by roughly 2% to 4% every year. This is due to investors switching in and out of funds at inappropriate times. Advisers can keep their clients from making this mistake and save them
    2% or more every year over the long term, providing a benefit that comfortably outstrips their cost.
  • In periods of low investment returns, the ‘added returns’ of financial advice become extremely valuable. Old Mutual Wealth’s
    research found that an adviser’s ability to select tax-efficient vehicles for clients can add up to as much as an extra 1.8%
    worth of ‘returns’ each year.
  • Advisers helping clients manage an intelligent withdrawal strategy can help minimise portfolio losses by as much as 3% per year. This broadly means deferring capital expenses and withdrawal increases (where possible) after a year of negative returns.

One of the problems with robo-advice is that it doesn’t provide the noninvestment ‘returns’ outlined above. Studies have also found that two of the things that clients value most in financial advice are personalisation (helping them understand what they want and building a plan around it) and empathy. This cannot be replicated by applications or online tools.

So where does this leave advisers in an era of lower, more volatile returns and increasing technology? By doing the basics right, the ‘added return’ of advice by far outstrips the savings in costs provided by robo-advice.

If advisers further ensure an advice experience that highlights personalisation and empathy, they will not only survive the threat posed by markets and technology, but also be able to charge what they need to knowing that the benefits they offer far outweigh their costs.

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