How advisors boost share portfolio returns 

I recently met with a new client that I had previously met 10 years ago. Back then, he opted to work with an advisor in his home state rather than engaging us, since he did not live in Victoria. In the end, he never found an advisor and decided to manage his investments himself. 

Fast forward to today, and he’s had a change of heart. He’s come to realise that having the right advisor is far more important than simply choosing one based on locality. As a result, I am grateful that he has now engaged our services. 

Despite not having an advisor, he has accumulated a significant amount of wealth over the past decade in a share portfolio, which initially made me think he had done quite well, and he has. But as we dug deeper, it became clear that some fundamental mistakes had cost him a lot of money – avoidable mistakes that a good advisor would have steered him away from. 

This got me thinking: what exactly do we look at when managing a client’s share portfolio? What value can an advisor bring?  

You would hope the advice would result in better returns 

The primary benefit an investor hopes to gain from receiving high-quality financial advice is, of course, better investment returns. Better compared to what? Investment returns should always be measured against a meaningful benchmark. 

If an investor believes they can outperform the broad market by picking and trading individual stocks, they are likely mistaken, as I discussed recently here. 

A more rational, disciplined investor, like the kind who regularly reads this blog 😉, might take a simpler approach, such as investing 50% in Vanguard’s Australian Shares Fund and 50% in its International Shares Fund. Since their inception in 1997, this strategy has delivered a little over 8% p.a. 

Therefore, to be conservative, I think it’s fair to use 7% to 8% p.a. as a reasonable benchmark that most investors can achieve without advice. 

What will an advisor do differently?  

(1) Portfolio construction  

A portfolio that’s evenly split between two broad index funds, such as the approach described above, is quite broad and not necessarily positioned to capture better-than-average future returns. This approach relies entirely on traditional market-cap indexing, which is essentially a quasi-growth strategy. Consequently, more than one-third of your portfolio ends up concentrated in just 20 stocks. 

This will continue to work well if large-cap stocks, particularly those that drove most of the index returns in 2024, continue to rise. But we know that won’t last forever.  

Historically, since 1927, value stocks have outperformed growth by an average of 4.4% p.a. So, the most recent decade, where growth has significantly outperformed value as depicted in the chart below, is an anomaly. At some point, mean reversion will kick in, and value will once again outperform, probably by a large margin.  

A good advisor should anticipate these cycles and structure portfolios accordingly. That means not just relying on traditional market-cap indexing but also incorporating a mix of rule-based, low-cost indexing strategies that improve diversification and increase the likelihood of capturing long-term outperformance when value inevitably reasserts itself.  

(2) Ongoing portfolio management is important too 

One of the most valuable roles a financial advisor plays is helping clients navigate the principles of behavioural finance. This means preventing clients from making impulsive investment decisions when patience is required and encouraging them to invest when fear or uncertainty might otherwise hold them back. By addressing emotional biases and providing objective, evidence-based advice, financial advisors help clients stay focused on their long-term financial goals. 

Over time, different investments grow at different rates, which can throw a portfolio out of balance. Left unchecked, this can result in overexposure to overvalued markets while being underweight in asset classes that are historically cheap and therefore likely to outperform in the future. Portfolio rebalancing helps correct this. That said, it’s also important to minimise turnover as much as possible since buying and selling investments trigger fees and taxes. Where possible, we prefer to use new investment funds to rebalance portfolios, as this reduces unnecessary turnover. 

That said, some investors can become too focused on minimising or avoiding capital gains tax (CGT), which can lead to poor decision-making – ultimately costing them money in lost returns or increasing portfolio risk.  

For example, consider an investor with a large position in a stock with significant unrealised capital gains. Selling would trigger tax, but holding onto the stock might expose them to excessive concentration risk which could have a big impact on portfolio returns. CSL is a good example of this dilemma. Its share price has traded between $250 and $300 for the past five years, meaning investors who held this stock for five years have not experienced any growth and a very small amount of income. This highlights the delicate balance required in portfolio management: minimising turnover is important, but not at the cost of sacrificing net, after-tax returns. Sometimes taking the CGT hit and reinvesting is the right approach to take.  

(3) Reduce portfolio risk  

I define portfolio risk as the risk that your investments fail to achieve your benchmark returns. If your portfolio is heavily weighted toward asset classes that have delivered above-average returns over the past 5 to 10 years, then I would argue you are carrying unnecessarily high risk – meaning there’s a higher probability of underperformance over the next decade. 

Gold is a great example. In Australian dollars, the gold price has surged an incredible 44% over the past year and has risen more than 10% per year over the past decade which is more than double its historical average over the past 100 years! Sure, the gold price could continue to rise, and no one knows where the peak is. But the probability of it maintaining 10% annual growth over the next decade is very low. If I owned gold, I would take my money and run.  

As a rule, the more wealth you have and the closer you are to retirement, the less risk you should take, because preserving capital becomes as, if not more, important than chasing higher returns.  

Even so, why take more risk than necessary? If your goal is to achieve long-term average returns of say 7% to 8% per year, then build a portfolio with the highest probability of hitting that target. By doing so, you will naturally reduce a lot of risk and almost guarantee that you will achieve your lifestyle and financial goals. 

A good advisor will help you take the least amount of risk necessary while still ensuring you achieve your goals. Ironically, by tilting a portfolio towards assets that are undervalued, you are not just managing risk today – you are also increasing the likelihood of achieving above-average returns over the long run. 

(4) Taxation efficiency  

The goal of investment advice is to maximise after-tax returns. This distinction is crucial because, at some point, whether it’s you or your beneficiaries, your investments will be sold one day, and tax may be paid. After all, the whole purpose of investing is to ultimately spend the money. That’s why tax efficiency matters. 

In my experience, investment products that are marketed heavily based on potential tax benefits, such as investment bonds and dividend substitution plans, often turn out to be poor solutions. If investors focus on optimising their investment ownership structures from the outset, these tax-driven products typically become unnecessary. 

Since tax is likely to be one of the biggest expenses you will face over your lifetime, it’s essential to take a multidisciplinary approach to portfolio construction. That means financial advisors and accountants work closely together to ensure both investment and tax outcomes are fully optimised. 

How much value can financial advisors offer?  

To sum up, an evidence-based advisor can construct a portfolio using various rules-based indexing methodologies, aiming to achieve above-average returns over the medium to long term. They prevent clients from making poor investment decisions, proactively minimise tax liabilities, and mitigate investment risks as much as possible.  

Of course, this is impossible to quantify precisely because everyone’s situation is different, and financial advisors vary significantly in both capability and investment philosophy. On top of that, people define “value” in different ways. 

That said, the most common determining factor is portfolio size and ongoing contributions. The more money you have, or the more you plan to invest, the more likely it is that a financial advisor can add value that outweighs their fees. In other words, the greater the stakes, the greater the potential benefit of professional advice.