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Making Advisor "Value Add” a Measurable Attribute

By Grace Williams May 12, 2017

With robos pulling focus from traditional financial advisors and the bull market looking longer in the tooth by the day, there’s been a lot of talk about the need for advisors to understand precisely when and how they “add value” — or, in franker terms, earn their keep above and beyond what a machine could do.

To help with this elusive calculation, Russell Investments conducts what is shaping up to be an annual report on FA value add. In its latest report, the fund manager pegs it at 4.08%.

Russell says advisors and firms in search of ways to stand out can prove their worth by paying attention to investor behavior. The single-largest contributor to advisor value in 2017 is acting as a “behavior coach,” which contributed 2%.

One real-world example occurred through the years 2009 to 2013, when many wary investors got out of the stock market. Notably, this exodus occurred even as the Russell 3000 index surged 16.1%. But there were more dramatic gains in store. “Investors who opted to stay in cash since the market bottom in 2009 to the end of 2016 forewent a cumulative return of 300%, based on the Russell 3000 Index,” according to the Russell report.

With returns like this in the balance, Brad Jung, Russell’s national sales chief, characterizes a valued advisor as “someone who can say ‘don’t get out’ in December 2008, because you’re on track to hit the goal in your portfolio, versus ‘it’s bad, get out now.’”

The human-versus-robo advisor debate is now a familiar one. The survey found the value of robo advice is 0.33%, with the ability to rebalance as needed cited as one advantage humans have over machines.

Regular portfolio rebalancing adds about 0.2% to value, and it adds 1.6% to risk reduction for the client, according to the survey. Meanwhile, Jung recommends an annual rebalancing check-up. “It doesn’t matter when or how, just do it,” he says. “It’s a way to lower volatility.”

JC Abusaid of Long Beach, Calif.-based Halbert Hargrove says there are typically three life cycles investors undergo: accumulation, transition, and spending and distribution. When an investor is in the accumulation mode, or just starting out, a robo can be a suitable option.

However, as life becomes more complicated, the need for increased human interaction and advice becomes more evident. This can render advice from a robo less relevant.

As clients get “closer to distribution mode, they’ll need to understand if [they] have enough and what [their] goals are so they can decide whether or not they need to take a personal risk,” says Abusaid, whose firm manages more than $2 billion. “They want to fund their goals correctly.”

Joe Duran of United Capital agrees with Russell’s conclusions. But he thinks FAs can do more to add value by focusing more on what he calls “life modification.” He says this calls for constantly tweaking financial plans as circumstances in the client’s life change and evolve.

“No machine can help people understand why they work and what they want their money to do for them,” says Duran, whose Newport Beach, Calif.-based firm manages around $18 billion.

By communicating more with clients about their lives, Duran believes FAs show their worth in very tangible ways.

Nobody plans on getting sick or weathering a market downturn, says Duran. So advisors have to be ready to meet with clients so that “when life happens, or the market happens,” they’re ready to re-set their plans.