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Financial Advice Is Here to Stay – for Good Reasons

By Jan Vlok, 27 November 2017

Today we operate in an environment characterised by widespread trends and commensurate changes.

The sustainability of both yesteryear’s practises and these emerging trends need to be investigated and scrutinised to forge the way forward. When tying this concept to finance, the impact on the industry is one of the most apparent and topical, particularly questioning the merits of having a financial adviser.

The role of the traditional financial adviser will undergo inevitable change. The contribution of an intermediary has been questioned of late, as technology may disrupt the role of a financial adviser. The concept of a robo-adviser has recently been introduced in South Africa, albeit, in a very simple form. The personal financial adviser, while keeping abreast of technological changes and their application, will probably be more client focussed in the future, with all number-crunching, fund selections, optimisation and adjustment of financial plans possibly outsourced to the digital counterparts. With human bias impacting investor emotions and decisions, a psychological skillset will potentially prove invaluable in this field going forward. Holistic financial planning and understanding client personalities are services that will add a lot of value to an individual’s financial position. But how does one measure the value that an intermediary adds to a client? Enter gamma, which is defined as the additional value-add attained through the utilisation of a financial adviser.

Upon investigation, the gamma effects are more clearly measured in diversification benefits and a savings discipline than increasing returns. Having said this, saving more and being better diversified should ensure more funds at the end of the investment horizon which is, after all, the end goal. A Canadian study¹ found that the benefits of having an adviser significantly increased savings rates and total non-cash investments. The study also found that, for identical households, those with an adviser for up to four years will have 69% more assets versus the unadvised household. This percentage jumps to 290% higher where the adviser has been present for 15 years and longer. The more pronounced benefits are higher income at retirement and overall better financial literacy – surely these are goals that all investors strive for.


Two of the more notable studies in this area have been conducted by Vanguard² and Morningstar³ (gamma). The fact that a global leader in indexing stresses the importance of a financial adviser should provide insight to the much-needed role of these professionals. The Morningstar study focused on more efficient retirement income, whereas the Vanguard study included benefits of educating and coaching clients. Both indicate a measurable value-add through having a financial adviser. It is easy to see the value-add of keeping individuals from making near-term investment decisions that could result in abandonment of a structured investment plan. However, suitable investment vehicles, investment destinations, liquidity management, dynamic withdrawal, after-fee and especially after-tax returns, play an equally important role in adding value for a client. The challenge is to measure this value-add (gamma) to prove the value that advisers add in personal finance.

The ideal measurement can be found in the comparison between the advised versus the unadvised scenario. The below graph displays the gamma a financial adviser can generate should the respective aspects be optimally structured:


Deconstructing these aspects down to their underlying parts illustrates how professional advice can add gamma for individual investors. The study was conducted in the United States, however, these are factors that impact individuals in South Africa in the same manner. Let’s break it down a bit more.

Investment Plan

A successful investment plan includes suitable asset allocation, fee optimisation, asset location (vehicles) as well as return sources. Combined, these aspects are integral to a successful investment plan and could add 1.7% of adviser’s gamma on average. Suitable asset allocation is a major consideration in pre-retirement money, where Regulation 28 makes it straightforward. However, in post-retirement and discretionary investments, this is a more challenging task. The question of how much to allocate offshore is always a challenge in SA, and is best left in the hands of qualified professionals. Regarding fee optimisation, it is not as simple as choosing the platform, advice fee and the investment that offers the lowest cost, but rather the best cost-benefit ratio for the investor. The correct investment vehicles for the individual’s specific circumstances are very important, adding a possible 0.75% annually of total investment plan gamma. In SA there are dozens of vehicles to choose from which offer different benefits and which are suitable for different individuals and life stages. The recently introduced TFSA (tax-free savings account) is more applicable to some than others. When applied properly, this vehicle can supplement retirement very meaningfully. The last component of investment plan gamma is return sources – placing funds in investments that grow with capital gain or dividends rather than inefficient income (interest) investments. Overall an adviser could add around 1.7% gamma through optimising these investment plan factors.

Risk & Tax

Risk and tax touches on rebalancing strategies as well as income strategies, which could add around 1.05% per year in gamma. Choosing the most optimal income withdrawal/generation strategy is the second benefit and adds around 0.7% of the risk and tax gamma, which may be quite conservative in SA. The widespread use of ILLAs (investment-linked living annuities) in SA makes this a very applicable value-add for investors in choosing a financial adviser. Listing the differences between vital goals and aspirational goals and subsequent prioritisation are better done with the objective view of an adviser. A rebalancing strategy that addresses risk and tax, and is informed by the cycles and the nuances of the funds invested in, is crucial in making the decisions – also a task best left to the professionals. Overall an adviser could add around 1.05% gamma through these factors relating to effective risk and tax planning.

Behavioural coaching

Behavioural coaching adds more or less 1.5% annual gamma, especially in protecting individuals from themselves during times of significant drawdowns. The returns that investors experience due to inherent biases, are actually very different from the actual net fund performance. Consider the ten years ending 31 December 2015, when investors trailed actual fund performance by 86-229 basis points per year (Morningstar), proving that our natural instinct sometimes drives us to do the exact opposite of what ensures long-term superior returns.

Whilst behavioural coaching encompasses support and helping clients to stay invested during times of market stress, it also covers some softer nuances encountered in investing. Investor behavioural biases which are detrimental to their long-run investment returns can be mitigated, and in some circumstances, totally eliminated. Let’s delve into some of these prevalent investor biases. Biases that spring to mind include herding, loss aversion, availability bias and limited cognition.

Loss aversion bias

Mitigating loss aversion, involves keeping investors from selling during times of market drawdown. The impact of this mistake is huge. For example, assume an amount was invested in the local equity market (FTSE/JSE ALSI) 20 years ago. If the investor missed only the top five trading days (0.1% of total trading days), which is impossible to anticipate, s/he would have 28% less capital versus the individual who had stayed invested. Clearly, protecting investors from this natural reaction during market stress is crucial.

Herding & availability biases

Herding and availability biases speak to investment fads and trends and usually the adviser’s hand being forced by the demands of the client. The recent emphasis on index funds relates to this quite significantly. Whilst these funds have merit in some portfolio contexts, blind faith in pure indexing as an investment strategy can be misleading. “Just look at the returns” is the default response of the advocates of this strategy. This bias is fuelled by hindsight, reinforced by herding because ‘everyone is doing it’.

Indices have produced competitive returns historically, but their use and application should be considered carefully, especially in our current environment. Indexing has enriched asset prices to unjustifiable levels. The environment where a lot of overvaluation is driven by index inclusion, the selection of specific single investments to a portfolio is crucial to avoid catastrophe. Trends tend to fade with time and the role of the adviser is crucial to educating the client and to locate the client’s funds in diversified investment strategies. This fact emphasises the need to partner with professionals to identify those managers that do, in fact, consistently deliver alpha.

Availability biases impact investments, and many other facets of life in this transitioning information age. In an era where most of the technology that we engage with is curated to our preferences, biases are accentuated to give us a false sense of confidence in our (selective) knowledge. The availability bias makes individuals choose readily available outcomes and see this as a true reflection of reality. This is achieved through presenting articles and pieces as fact, rather than interpretation or opinion.

Limited cognition bias

And then there’s information overload. In a universe where so much information is at your fingertips, how do you decide what is fact and/or applicable? How much of the information available can be trusted? Enter the concept of limited cognition – the behavioural bias that accepts a sub-optimal solution to a complex problem, due in part, to the daunting task of evaluating all available options. Usually, what conforms to our inherent biases is what we consume. However, individuals are not indefinitely naïve or uninformed. They take cognisance of their potentially wrong decisions and take steps to avoid or mitigate them. In economic theory this is known as mental accounting. The phenomenon has the outcome that individuals think about investments piecemeal rather than the correct, total portfolio approach. Consider the common practice of simultaneously having a savings account and credit card debt.

Through behavioural coaching and consequently mitigating these inherent biases that most individuals exhibit, an adviser could add around 1.5% of gamma annually. This figure is quite conservative though, given the possible disastrous implications emotional decisions may have on a client’s future financial position.


These are all areas where the guidance of a financial adviser is critical. The total gamma that can be extracted equates to around 4.25% per year, indicating the immense value that financial advisers can, and in fact, do add. These professionals keep abreast of relevant information that impact investments and personal finance. They have access to information hubs dedicated to relevant facts and data, and not just trends and hype news. They are professional and know what is relevant to their profession, and what is noise or distraction. The role of an adviser remains imperative in mitigating the risks all of us face through our behavioural biases and misinformation, and assists us to progress on our successful personal financial journey.

The role of the adviser is in the process of change. From managing the prevailing biases to being more innovative, their role will continue to be imperative in reaching financial success for their clients over the long term, especially in the ever-changing landscape of our environment. In a world of value add products, millions of investable options, smoke, mirrors and information overload, all individuals from all walks of life are more in need of financial guidance, assistance and advice than ever.

• 1 – For the full paper: and for the condensed findings:
• 2 – See the overview of the study here: and the quantitative findings here:
• 3 – See the paper by David Blanchett:
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