What ‘advisers’ alpha’ is worth

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.”

Comments from our readers

On 19 July 2012 at 8:33 am brent sheather said:

unbelievable !!

On 19 July 2012 at 5:42 pm Fairfax O Rourke said:

This concept of adviser alpha is a good one and something that needs to be communicated to the wider public.

On 19 July 2012 at 6:00 pm economic rationilist said:

What a load of nonsense. The 1% from not doing stupid things and the 3% from not selling low and buying high can be saved just from using a passive fund and dollar averaging, without having to pay any commission.

On 20 July 2012 at 11:43 am John Milner said:

Not quite sure what Brent Sheather was attempting to communicate?
Economic Rationalist - your comments are somewhat naive. Merely dollar cost averaging within a passive fund does not solve all of your problems. Which fund, asset allocation, cash flow modelling, outcome goals, ownership structure, etc,etc,etc. By the way, my clients are invested within a passive structure.

On 24 July 2012 at 9:37 pm Matt Y said:

I think Brent sums this article up nicely.

I will enjoy watching these comments being communicated to the general public. i.e. As one of the most trusted professions we save you 4% by allowing you not to be stupid and stopping you from trying to time the market.

What next; a fee hike for these tremendous services on offer? I think a Tui billboard would be more apt. 6%.....

On 26 July 2012 at 8:50 am denis said:

Drip-feeding money into savings over time (i.e. not trying to time the market) is how KiwiSaver works for employees - about 1m people are doing that right now. It's also how workplace superannuation schemes have operated for decades.

How that can be uniquely claimed by Advisers as "Alpha" is beyond me.

What ‘advisers’ alpha’ is worth

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

Comments from our readers

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