How behavioural coaching can prove valuable in the fee wars

To compete against lower-cost rivals, advisors must keep clients from becoming their own worst enemies

By Leo Almazora

Oct 17, 2018

The fund fee war appears to be nearing its conclusion, with some providers officially announcing zero fees to become loss leaders in specific segments. But the pressure is intensifying on another front as cost-conscious investors are weighing the choice between fee-based advisors and commission-compensated brokers.

“Under the broker model, opaqueness is the name of the game as ‘financial advice’ fees/commissions are embedded in the broker’s recommended investments,” noted Nate Geraci in a column for the ETF Educator. “On the other hand, with fee-based advisors, transparency rules the day, with financial advice fees always separate from any suggested investments.”

The transparency offered by fee-based advisors, Geraci noted, leads to additional scrutiny. Citing research from Cerulli Associates, he said the majority of investors with US$1.5 million or less in investable assets pay fee-based advisors between 1% and 1.5% of their AUM every year. In the current low-cost environment, it’s not surprising to ask whether that level of compensation is fair.

“[H]igh-quality advisors have the potential to add about 3% annually through things like selecting cost-effective investments, disciplined rebalancing, behavioral coaching, and ensuring investments are located in proper accounts,” he said, citing research from Vanguard. Out of seven factors the firm identified in its Advisor Alpha framework, the single biggest value-add advisors came from behavioural coaching, which accounted for 150 basis points.

Coaching can prove valuable in helping investors avoid self-destructive behaviours such as bailing on an investment plan at the wrong time, putting everything on a hot tech stock just as it tops out, and knee-jerk reactions to pundits on the media.

A quality advisor also provides guidance in matters outside investments. With comprehensive financial planning, they can help clients through challenges in budgeting, retirement planning, coordinating estate issues, tax strategy, and so on. And even within the sphere of investments, a true advisor could provide value by ensuring their clients use low-cost investments, rebalance their portfolios when needed, put assets in the appropriate accounts, and more.

“If you’re comfortable talking to someone via phone or Skype, a call center advisor can work just fine,” Geraci said. “Some call center advisors are even staffed with Certified Financial Planners, providing advice beyond investments. You just have to be comfortable spilling the details of your financial life over the phone.”

However, he added, highly emotional investors may not be satisfied with that — particularly when the market is tumbling and they have to deal with an overloaded phone-based or online platform.

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