When paying for a service such as financial planning or advice it can be a challenge for the consumer to understand what they will get in return, and so evaluate the value for money they will receive.
Investment giant Vanguard attempts to quantify the added value of best practices in financial advice through its ‘Adviser Alpha’ reports. From the seven areas measured Vanguard conclude that this added value is ‘about 3% in net returns’. In practice, consumers will determine the value of advice and reward an adviser they trust with loyalty.
To help understand value for money in the context of investing I will focus on the views of Warren Buffet, one of the greatest investors of our time. A well-known quote from Buffet proclaims “Price is what you pay; value is what you get”.
So, if when investing we consider ‘price’ as the fees for investment management it should therefore be easy to identify the ‘value’ received. Then again, the value often communicated by investment managers relates to the past performance of their investments.
For many choices in life we rely on past performance to aid decision‑making. This may serve us well in things such as choosing a restaurant or a car but it is an unwise to select investments solely on this metric. Given the uncertainty of future markets the ‘what you get’ is not finally known until it’s got. When facing an unknown such as this human instinct is to focus on a known factor – the price.
The full Buffet quote from his shareholder letter reads; “Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
A disadvantage to holding price as the primary measure of value is that lower prices do not necessarily raise the value. On this basis, lower prices are opportunities to increase value where we can be confident of the future result. In some sectors a new product that promises to match my current brand at a lower cost must be attractive. Supermarkets understand this where ‘own brand’ products compete with more expensive brands.
On the other hand, higher prices can be used to imply higher quality, creating the impression that comparative value is being maintained and possibly increased. Think of a ready meal from Marks & Spencer v Lidl. The value of the more expensive meal can be tested and assessed in the first purchase. If you find little value in the premium price of a dinner, the lesson cost you only a few pounds.
In contrast to supermarkets, the varying quality of financial services costs customers an indefinite price measured in thousands of pounds. Data on the comparative success of financial planning strategies between advisers is not compiled, let alone verifiable.
If you do not know the true cost and do not fully understand the service you are getting, you cannot tell the value. That being so, financial planning should be priced as a project, not linked to investment. It should reflect the quality of the service, but also the benefits.
The value of financial advice can be measurable against a specified goal. For many we advise a planning goal is to enjoy a fulfilling retirement, accompanied by an investment goal to protect the buying power of their savings.
When making big decisions that will determine their future lifestyle and wellbeing, our clients recognise the value in paying for the knowledge and experience that goes into a structured financial plan and for the reassurance of ongoing advice. This brings to mind a quote from another pioneering investment strategist:
“An investment in knowledge pays the best interest.” –Benjamin Franklin
Barra Gorman FPFS
Chartered Financial Planner
Succeed Wealth Management