What ‘advisers’ alpha’ is worth

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Financial advisers provide non-investment benefits of as much as 6% per year for their clients, an international risk profiling expert says.

Thursday, July 19th 2012, 7:50AM 6 Comments

by Niko Kloeten

FinaMetrica co-founder Paul Resnik told attendees at the Institute of Financial Advisers conference yesterday that financial planners need to emphasise this “advisers’ alpha” to current and potential clients.

“The advisers’ alpha I would argue is worth 6% per annum, which is about three to four times what the adviser charges,” he said.

Resnik said his estimated figure came from adding together a variety of incremental benefits clients receive from using a financial adviser.

He said 1% came from advisers being more efficient constructing portfolios, while another 1% came from maximising the tax efficiency of portfolios; advisers also saved clients 1% by making sure they didn’t do anything stupid.

However, he said the biggest benefit related to the fact that “People in funds tend to get lower returns than the funds themselves because of timing; they buy high and sell low.”

Resnik said advisers added about 3% just by reducing this difference, which international research suggested was typically 6-8%.

Advisers should focus on marketing this ‘alpha’ because investment alpha is much harder to find, he said.

ANZ Wealth’s Simon Botherway picked up on the theme of advisers’ alpha when he spoke later in the day about some of the risks and challenges for advisers achieving positive real returns in the next decade.

One of the big challenges, he said, would be dealing with the low interest rates and higher inflation resulting from central banks printing money to aid in deleveraging.

“The majority of client portfolios are substantially fixed income oriented and this is partly driven by client choice,” he said. 

“This is where the concept of advisers’ alpha is very important; a lot of hand-holding is going to have to go on to maintain the purchasing power of client funds.”

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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