Why do insurers allow advisers to choose ARF commission rate?

[time to plan]

How does one prove it though when people debunk anything that’s out there?

I have more than a hunch…it’s obvious that it does.

Find me proof that using a proper builder to renovate your house leads to better outcomes than doing it yourself…

Very difficult to prove I agree. You would need to prove correlation and then causation (maybe people who choose to get financial advice would fare better in any case - a reverse correlation). A well designed longitudinal study would be a tough gig.

But agreeing that it is very difficult to evidence leads us towards an agreement that there isn’t good evidence.

So we should stop believing in marketing materials that confirm our hunches. I am sure you could get all sorts of that kind of thing from a homeopath.

As for a builder, sounds like you’ve got another hunch. We all have them and use them to navigate life and shortcut decisions but it’s worth examining them occasionally.

 

[Duke of Marmalade]

Behavioural coaching is listed at 150 basis points

To be absolutely precise Vanguard say that their course on behavioural coaching adds 150bp. Sure Guinness used to say their product was good for you.
Interesting quote on page 2 of the Vanguard link states that "the overwhelming majority of mutual fund assets are advised". @Gordon Gekko has cited sources that claim that the vast majority of mutual fund investors are screwed. I'll leave it to others to join the dots.
I think the comparison between a dentist and a financial advisor is a fair one. They certainly know how to extract.
(just my little joke)

 

[Marc]

Reproduced without comment

Financial advisers coaching clients through the pandemic with a disciplined approach to investing have added approximately 5.2 per cent in value to client portfolios according to a new report from Russell Investments.

The 2021 Russell Investments Value of an Adviser Report says advisers helped Australians avoid a “litany of poor investment calls” since the start of the pandemic in 2020, including pulling out their investments at the volatility trough in March last year.

“Throughout the COVID-induced market dislocation and recovery, the most critical mistake non-advised investors made was to not hold the line on their investment strategies and sell out of equities after dramatic market falls – and then find it hard to time a re-entry as the market roared back to life,” Russell states.

While advisers largely prevented their clients from being among those that pulled an estimated $40.5 billion out of the superannuation system when valuations were at their lowest, Russell says the 5.2 per cent savings figure comes from a number of sources.

“The value of an adviser calculation is drawn from five key elements: preventing behavioural mistakes (2 per cent); advising on appropriate asset allocation (1.1 per cent); optimising cash holdings (0.6 per cent); tax-effective investing and planning (1.5 per cent); and the priceless value of expert wealth management knowledge derived from years of market experience,” Russell states.

Russell’s head of business solutions Bronwyn Yates said the events that unfolded during the heat of the pandemic have only underscored the important role advisers play.

“Investors that have been educated by a financial adviser understand there will be ups and downs along their financial journey, so they feel comfortable in staying the course,” Yates said.

“However, non-advised investors struggle to make the correct decision when markets are volatile, and often attempt to time the market. This is an issue which plagues both those with loss aversion, and those convinced they can beat the market. It’s also a timely consideration for the growing ranks of millennials and Gen Z turning to fin-fluencers as their source for financial advice.”

 

[Steven Barrett]

A big caveat is whether you are talking to an advisor who is providing you with honest advice for a fee or a salesman who is maximising the amount of commission payable to him from your money. The financial outcomes under both situations will be vary different.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[time to plan]

Reproduced without comment

Financial advisers coaching clients through the pandemic with a disciplined approach to investing have added approximately 5.2 per cent in value to client portfolios according to a new report from Russell Investments.

The 2021 Russell Investments Value of an Adviser Report says advisers helped Australians avoid a “litany of poor investment calls” since the start of the pandemic in 2020, including pulling out their investments at the volatility trough in March last year.

“Throughout the COVID-induced market dislocation and recovery, the most critical mistake non-advised investors made was to not hold the line on their investment strategies and sell out of equities after dramatic market falls – and then find it hard to time a re-entry as the market roared back to life,” Russell states.

While advisers largely prevented their clients from being among those that pulled an estimated $40.5 billion out of the superannuation system when valuations were at their lowest, Russell says the 5.2 per cent savings figure comes from a number of sources.

“The value of an adviser calculation is drawn from five key elements: preventing behavioural mistakes (2 per cent); advising on appropriate asset allocation (1.1 per cent); optimising cash holdings (0.6 per cent); tax-effective investing and planning (1.5 per cent); and the priceless value of expert wealth management knowledge derived from years of market experience,” Russell states.

Russell’s head of business solutions Bronwyn Yates said the events that unfolded during the heat of the pandemic have only underscored the important role advisers play.

“Investors that have been educated by a financial adviser understand there will be ups and downs along their financial journey, so they feel comfortable in staying the course,” Yates said.

“However, non-advised investors struggle to make the correct decision when markets are volatile, and often attempt to time the market. This is an issue which plagues both those with loss aversion, and those convinced they can beat the market. It’s also a timely consideration for the growing ranks of millennials and Gen Z turning to fin-fluencers as their source for financial advice.”

All very interesting Marc, but Russell Investments is hardly an independent peer reviewed learned journal. So it’s all a bit 82% of women who used Pantene said their hair was shinier and stronger.

I’m not saying it’s not true but we can’t trust that it is.

 

[Duke of Marmalade]

Behavioural advice?
I wonder how advisors sell this service. The honest approach is as follows:
"Folk make the mistake of panicking when markets have a severe setback. We will be available like The Samaritans to tell you not to panic. In fact we will set up a recorded message on a helpline in those circumstances"
Honest but is it always correct? Is it worth €5,000 (€2,000) p.a.?
The fraudulent approach goes as follows though in more veiled terms:
"Surveys show consistently that folk sell at the wrong time and are inclined to panic in the face of market setbacks. We will be able to advise you if any market setback is just temporary or if it is time for you to get out. Surveys show that by giving this advice we add 2% p.a. (€20,000) to clients' fund performance. Come on, doesn't €5k seem cheap for that service?".

 

[Marc]

I suppose the problem here is that any evidence an adviser actually provides of real clients accounts showing the impact of advice given at the bottom of the market is never going to be a statistically significant sample even though this applied to a very large number of clients

Coronavirus one year on - Everlake

We don't subscribe to any market timing strategy because we don't possess a crystal ball but from time to time it is clearly appropriate for a nudge on the tiller and to trim the sails.....

globalwealth.ie

Its patently obvious that something dramatically changed in this client's portfolio in the Spring of 2020 AND that it was to their benefit.

There is another factor at play here which is also relevant which is that the client was extremely ill and the death benefit on their old pension contract was a return of fund with interest. A sum of just €17,000 vs a transfer value of nearly €600,000.

So there we are measuring the value of advice relative to the impact of potential future events. Very intangible and difficult to ascribe an accurate value since very often, it depends.

I could easily claim that the added "value" for this client is on the order of the improved death benefits (around €500,000) plus the value added from asset allocation say another €100 grand. So about €600,000 added to a €600 grand pension. But those numbers are very easy to challenge even with the facts before us. Whereas we do know exactly what the client is paying us which for the record is about €300pm. Its much easier to focus on cost because its more tangible.

Of course, if the market had continued to fall an adviser wouldn't be able to use this as evidence of "good advice" so on balance it will always look to an extent like good luck. Equally, since the client hasn't actually died yet, I can't really claim the value of the death benefit.

That's the real challenge here. How do you accurately measure the impact of an adviser relative to a client working on their own. Obviously it depends on the client it depends on the adviser, it depends if the client actually implements the adviser's recommendations and it depends to an extent on how events in the future actually play out so that the client actually sees a real tangible benefit.

The best analogy I can make is that a client working without an adviser is like someone playing blackjack in a Casino who knows you are supposed to get to 21 in order to win. Whereas working with an adviser is like playing with someone who has the American Mensa Guide to Casino Gambling (I do in fact own a copy) and is having a stab at counting cards in a five deck shoe.

You just about reduce the house edge to a positive 0.5% advantage to yourself. It's not a huge difference but its better than playing the slots!!

Just to prove this isn't an isolated and cherry picked example

 

[time to plan]

I suppose the problem here is that any evidence an adviser actually provides of real clients accounts showing the impact of advice given at the bottom of the market is never going to be a statistically significant sample.

Its patently obvious that something dramatically changed in this client's portfolio in the Spring of 2020 AND that it was to their benefit.

Of course, if the market had continued to fall an adviser wouldn't be able to use this as evidence of "good advice" so on balance it will always look to an extent like good luck.

That's the real challenge here. How do you accurately measure the impact of an adviser relative to a client working on their own. Obviously it depends on the client it depends on the adviser, it depends if the client actually implements the adviser's recommendations and it depends to an extent on who events in the future actually play out so that the client actually sees a real tangible benefit.

The best analogy I can make is that a client working without an adviser is like someone playing blackjack in a Casino who knows you are supposed to get to 21 in order to win. Whereas working with an adviser is like playing with someone who has the American Mensa Guide to Casino Gambling (I do in fact own a copy) and is having a stab at counting cards in a five deck shoe.

You just about reduce the house edge to a positive 0.5% advantage to yourself. It's not a huge difference but its better than playing the slots!!

One of the problems is how do you design a longitudinal study, either in the model of a clinical trial (with a control group) or as an observational study. There are a lot of confounding factors to deal with. Here is a statement which I reckon is true:

People who consult a financial professional are on average richer in retirement than people who don't.

But the main causal link is likely to be that richer people consult financial professionals.

You could then look at people who consult financial professionals vs a cohort of people who don't but who are of equivalent wealth at the start of the process. If those that consult financial professionals fare better, then what does that tell you? Maybe people who are more engaged with their finances are more likely to consult a professional so would have fared better anyway. Maybe reading a defined short book once a year would lead to better outcomes.

It's an interesting problem.

That's the world we live in: when it comes to economics, people have emotions; it's not like chemistry or physics.

Robert J. Shiller

 

[time to plan]

Its patently obvious that something dramatically changed in this client's portfolio in the Spring of 2020 AND that it was to their benefit.

People often get better after visiting homeopaths, just as they do after visiting medical doctors. So the graph doesn't tell us which category financial professionals fit into.

 

[time to plan]

Another thought on this is whether Financial Advisers are following evidence based practice for investment and investment advice, is such a thing exists.

 

[Marc]

https://youtu.be/tkHpahHjR8o

Investment Philosophy

At Global Wealth, we don’t manage investments, we manage investors

viewer.joomag.com

Final observation

We don't actually use Life Assurance Companies for ARFs and we don't take any commissions. Probably should have mentioned that

 

[Sarenco]

I have absolutely no doubt that a financial adviser can potentially add value to their clients. Let's take that as a given.

However, I am interested in teasing out the claim that there is plenty of evidence that clients working with an adviser typically do better than those without.

This academic paper seems to offer some evidence that the opposite is actually the case:

Financial Advisors: A Case of Babysitters?

We use two data sets, one from a large brokerage and another from a major bank, to ask: (i) whether financial advisors are more likely to be matched with poorer

papers.ssrn.com

The paper examines two data sets, one from a large German brokerage and another from a major German bank, to ask: (i) whether financial advisors are more likely to be matched with poorer, uninformed investors or with richer and experienced investors; (ii) how advised accounts actually perform relative to self-managed accounts; and (iii) whether the contribution of independent and bank advisors is similar.

The authors find that advised accounts offer on average lower net returns and inferior risk-return tradeoffs (Sharpe ratios) regardless of the advisory model.

Now, that is obviously just one study and I certainly don't think we can conclude that it is universally the case that DIY investors do better than investors working with an adviser.

However, I think it is telling that none of the big fund houses with advisory arms (Vanguard, Fidelity, etc), to my knowledge, have produced data showing that investors working with an adviser typically do better than those without.

 

[Steven Barrett]

Behavioural advice?
I wonder how advisors sell this service. The honest approach is as follows:
"Folk make the mistake of panicking when markets have a severe setback. We will be available like The Samaritans to tell you not to panic. In fact we will set up a recorded message on a helpline in those circumstances"
Honest but is it always correct? Is it worth €5,000 (€2,000) p.a.?
The fraudulent approach goes as follows though in more veiled terms:
"Surveys show consistently that folk sell at the wrong time and are inclined to panic in the face of market setbacks. We will be able to advise you if any market setback is just temporary or if it is time for you to get out. Surveys show that by giving this advice we add 2% p.a. (€20,000) to clients' fund performance. Come on, doesn't €5k seem cheap for that service?".

Duke, it's a lot more than that. It is not just looking at a policy on its own and advising on that all of their wealth.

I work with clients who are absolutely awful with money. Usually they are high earners as they never really had to save for anything. But they are not wealthy. Ironically, these people are the least likely to panic when there is a crash because they never look at their investments, it's not something they care about.

 

[Duke of Marmalade]

Duke, it's a lot more than that. It is not just looking at a policy on its own and advising on that all of their wealth.

I work with clients who are absolutely awful with money. Usually they are high earners as they never really had to save for anything. But they are not wealthy. Ironically, these people are the least likely to panic when there is a crash because they never look at their investments, it's not something they care about.

Steven
I know that many financial advisors provide a valuable service in terms of organising people's finances in the context of the tax and other regulations, on estate planning, on knowledge of the range of investment options etc.
But I remain very skeptical of this "behavioural advice" in the context of investment decisions. What I am hearing seems mainly to revolve around preventing people panicking when markets dive and of course recent experience is cited to underline the efficacy of this advice.
Maybe a few words at the initial consultation to warn that there may be choppy times ahead and if you feel worried your advisor is at the end of the phone. But nothing that would justify the types of retainer/trailer fees that OP is criticising.

 

[SGWidow]

But nothing that would justify the types of retainer/trailer fees that OP is criticising.

This is the key point - certainly for the non-clueless investor. My sense is that this thread has run its course because the financial advisers will never accept this and we will just go round in circles. This is not a particular surprise. I think it was on this site that I once read that it's hard for someone to understand something when his income is dependent on him on understanding it. How true. In particular, I would just point out how specific questions in this thread have not been answered...….I won't now or later waste my time looking for them. I have read enough nonsense.

 

[Steven Barrett]

Steven
I know that many financial advisors provide a valuable service in terms of organising people's finances in the context of the tax and other regulations, on estate planning, on knowledge of the range of investment options etc.
But I remain very skeptical of this "behavioural advice" in the context of investment decisions. What I am hearing seems mainly to revolve around preventing people panicking when markets dive and of course recent experience is cited to underline the efficacy of this advice.
Maybe a few words at the initial consultation to warn that there may be choppy times ahead and if you feel worried your advisor is at the end of the phone. But nothing that would justify the types of retainer/trailer fees that OP is criticising.

That's because you wouldn't charge fees at that level for just giving advice on investment decisions, it would cover over services, which as you pointed out earlier, should be VATable but because it comes in the form of commission from a life company, it isn't.

 

[Marc]

it’s not like this question hasn’t been extensively studied


Bae, S.C., and J. P. Sandager (1997). What Consumers Look For In Financial Planners. Journal of Financial Counseling and Planning, 8(2), pp. 9-16.

Blanchett, D. and P. Kaplan (2013). Alpha, Beta, and Now...Gamma. The Journal of Retirement, Fall, (2) 29-45.

Brenner, L. and T. Meyll (2020). Robo-advisors: A substitute for human financial advice? Journal of Behavioral and Experimental Finance, 25, pp. 1-8.

Cheng, Y. and C.M. Kalenkosi (2011). Lost in Fees; An Analysis of Financial Planning Compensation. Journal of Wealth Management, Spring, pp. 46-54.

Egan, M. (2019). Brokers versus Retail Investors: Conflicting Interests and Dominated Products. Journal of Finance, 74(3), pp. 1217-1260.

Fama, E.F. and K.R. French (2010). Luck versus Skill in the Cross-Section of Mutual Fund Returns. Journal of Finance, 65(5) pp.1915-1947.

Finke, M.S., S.J. Huston, and D.D. Winchester (2011). Financial Advice: Who Pays. Journal of Financial Counseling and Planning, 22(1), pp. 18-26.

Haslem, J. A. (2010). The New Reality of Financial Advisors and Investors. Journal of Investing, 19(4), pp. 23-30.

Hoechle, D., S. Ruenzi, N. Schaub, and M. Schmid (2018). Financial Advice and Bank Profits. The Review of Financial Studies, 31(11) pp. 4447-4492.

Kitces, M. E. (2013). A ‘New Normal’ Look at Practice Growth. Journal of Financial Planning, 26(1), pp. 16.

Kitces, M. E. (2017). Financial Advisor Fees Comparison – All-In Costs For The Typical Financial Advisor?
www.kitces.com


Lahtinen, K.D. and S. Shipe (2018). Compensation of Investment Advisors. Journal of Investing, Spring, pp. 80-86.

MacKillop, S. (2017). It’s Time to Reexamine Your Fee Schedule. Journal of Financial Planning, 30(5), pp.34.

Mazzoli, C. and G. Nicolini (2010). To fee or not to fee: Pricing policies in financial counseling. Financial Services Review, 19, pp. 307-322.

Opiela, N. (2006). The Future of Fees. Journal of Financial Planning, 19(8), pp. 24-31. Seay, M. C., S. G. Anderson, D. R. Lawson, and K. Tae Kim (2017).

Identifying Variation in
Client Characteristics between Financial Planning Compensation Models. Journal ofFinancial Planning, 30(10), pp. 40-51.

SEC (2014). How Fees and Expenses Affect Your Investment Portfolio. Investor Bulletin –
Security and Exchange Commission’s Office of Investor Education, Pub. No. 164. Statman, M. (2000). The 93.6% Question of Financial Advisors. Journal of Investing, 9(1), pp.
16-20.

Uhl, M. W. and P. Rohner (2018). Robo-Advisors versus Traditional Investment Advisors: An Unequal Game, The Journal of Wealth management, Summer, pp. 44-50.

 

[Marc]

This is a nice short video made by my good friends at Regis Media for a firm I know well based in Dubai AES

Michael Kitces is a respected financial planner in the USA and prolific researcher and author

Video | How to choose a financial adviser

A highly qualified financial expert can add significant value to your life. However, how do you choose the a suitable financial adviser whose interests are aligned with your own?

hubs.ly

 

[time to plan]

Michael Kitces is a respected financial planner in the USA and prolific researcher and author

Video | How to choose a financial adviser

A highly qualified financial expert can add significant value to your life. However, how do you choose the a suitable financial adviser whose interests are aligned with your own?

hubs.ly

Funnily enough Marc, I was reading a blog post of his yesterday.

Can We Trust Research On The Use Of Financial Advisors?

Whether we can trust different types of research on the use and benefits of financial advisors, and why it's best to have a healthy degree of skepticism.

www.kitces.com

 

[Wollie]

@time to plan Thanks for posting. I really liked this sentence:
In some cases, the “best” advice may require sacrificing financial gains for other ends (e.g., psychological comfort), which means the “best” advice could be wealth-reducing!
Never a truer word was spoken. If someone is as nervous as a kitten, it's bad advice to put them into a risky investment.

However, I would like to get back to my original post, which was aimed at insurers, not intermediaries.
Suppose the insurer has two identical clients, with exactly the same risk profiles, making exactly the same fund choices. The difference is that, in one case, the intermediary has demanded 0.5% trail commission; the other is happy with 0.1%. The client pays for the excess commission to the first intermediary. How can the insurer's directors and senior managers stand over this? Do they demand that the first intermediary provide five times the level of ongoing service as the second? Should they?