The Value of Financial Advice

Getting the right financial advice can deliver more than just better investment outcomes. It can result in increased peace of mind heading into retirement, lower stress in a relationship or even higher happiness levels.

The research is clear cut, people who receive Financial advice are generally happier and are likely have a higher level of wealth at the point of retirement.

Even for those who receive limited advice on specific elements of their financial situation can experience material benefits.

Analysis supporting these conclusions can be found in a recent research paper by the Australian Financial Services Council, which was prepared by Rice Warner, Titled “Future of Advice”.

The paper covers several topics, with the aim of advancing the public policy debate on Australian financial services.  Albeit the Australian focus, there are key learnings for all.

This is an important issue; the personal and broader economic impacts are material.  The benefits of sound financial advice should be championed more widely.

In addition to analysing the current landscape for Financial Advice within Australia the report covers:

  • The need for Advice, and size of the Australian market
  • The Value of Advice, both tangible and intangible benefits
  • A proposed model which seeks simplification, affordability, accessibility and quality of Advice.

I may Post some of the other topics, this short Post focusses on the Value of Financial Advice.

The Value of Financial Advice

In summary, Rice Warner conclude: “We show that people who receive advice are generally happier, with an improved peace of mind.

On a macro level, we set out that advice leads to higher wealth which in turn leads to lower dependency on government benefits such as the Age Pension.”

The Australian Age Pension is designed to provide income support to older Australians who need it, while encouraging pensioners to maximise their overall incomes. The Age Pension is paid to people who meet age and residency requirements, subject to a means test.

Rice Warner divide the benefits of Financial Advice into two categories for the individual:

  • Quantifiable financial benefits – Tangible Value
  • Intangible value – the non-quantifiable and non-financial benefits provided through advice relationships.

They also consider the economic value, the benefits which flow to the broader economy, through greater use of Financial Advice.

Tangible Benefits

Firstly Rice Warner note the plethora of pre-existing research on the benefits of Financial Advice, they provide the following examples:

  • Russell Investments estimated in 2018 that a full suite of adviser services could be worth up to 3% per annum to an investor.
  • The FSC estimated in 20117 that the provision of savings advice would lead to an individual being between $29,000 and $91,000 better off at the point of retirement. In this research individuals who received advice at a young age received greater value.
  • Survey-based research conducted in 2014 demonstrated that investors who received advice over: – Four to six years accumulated 60% more assets than those individuals who had no advice. – Periods exceeding 15 years accumulated 290% more assets than other comparable households.

They also undertook their own analysis, considering three levels of advice: No Advice; Advice where additional contributions to super and additional personal wealth savings; Asset Allocation Advice (advice in relation to Super Fund only).

They also considered five different member profiles, based on age and level of starting wealth.

They concluded:

  • For average Australians, advice will likely add value to both an individual’s superannuation and their personal wealth. For most, this value will be greatest in the personal wealth component of their wealth portfolio due to the strong existing default structures within superannuation in Australia.
  • Asset allocation advice provides the greatest cumulative increase in funds at retirement when this advice is taken at younger ages. This is because younger individuals have a greater investment period over which to compound the benefits of higher rates of return.
  • Irrespective of level of wealth, for an individual aged 40, approximately half the value of the full advice scenario is derived from simple advice in respect of savings.
  • Individuals who occupy low socio-economic wealth bands are expected to gain more from advice than those who are wealthy. This reflects the tendency of these individuals to: – Save less of their disposable income (in proportional terms). – Allocate assets to safe but low-yielding asset classes (such as Cash and Term Deposits).

The implications of this analysis is that those who seek Financial Advice will likely have a higher level of wealth at the point of retirement.

Rice Warner’s results “suggest that taking limited advice on specific elements of one’s financial situation can lead to material benefits. For example, taking advice on savings, or the construction of portfolios for an individual’s private wealth.”

Intangible Benefits

Rice Warner sum it up succinctly “Financial Advice can maximise the upside, and limit and minimise the downside, of financial decisions. However, simply focusing on a potential monetary value-add ignores other aspects such as the comfort of being secure. We also need to consider the behavioural aspects of consumer decision making in respect of advice. Their perceived need for advice is what drives the market. Consumers need to have a recognition of the need for advice, a willingness to engage with advisers and a willingness to pay. Their willingness to engage will depend on their perception of the potential for favourable outcomes, but it will also depend on their perception of risk – and the cost.”

Ricer Warner note the intangible benefits of Financial Advice include:

  • People who are advised have greater levels of overall happiness.
  •  People who are advised have greater piece of mind.
  • Taking advice can lead to improved relationships due to the alleviation of money-related issues.
  • People who are advised may have better health.

I have re-created the following Table from their report which outlines the research that supports these benefits.

Greater levels of happinessIOOF white paperIndividuals who are advised have 13% greater levels of overall personal happiness than non-advised individuals.
Greater levels of happinessAdvice and Limited Advice Report by Investment TrendsAcross individuals who use a financial planner as their main source of advice:  87% said their adviser made a positive or significantly positive difference to their life. 89% said their most recent discussion with their financial planner was valuable or very valuable.
Improved peace of mindIOOF white paperSurveys of advised clients suggested that advice lead to: 21% more peace of mind with regards to their financial future. 20% increased feelings of security regarding their day to day finances.
Improved peace of mindMLC Wealth Submission – RIRSurveys of advised clients suggested that advice lead to: 79.4% of clients being instilled with improved peace of mind. 81.5% of clients feeling that Financial Advice has left them more confident about making decisions
Improved RelationshipsIOOF white paperSurveys of advised clients suggested that advice led to: 19% less likely to have arguments with loved ones about money.21% less likely to have their personal relationships impacted due to concerns about money
Improved healthIOOF white paperConsumers who do not receive professional ongoing advice are 22 per cent more likely to have their sleep disrupted due to concerns about money than non-advised clients.

The Rice Warner report can be found here.

New Zealand Experience

In New Zealand the Financial Services Council has conducted research into the value of Financial Advice: “The good news is, the value of advice does clearly outweigh the cost. Those who are advised are delivered a 4% increase in investment returns, about 52% more in their KiwiSaver and save 3.7% more for their retirement than those who are unadvised.

Their report can be found here.  And is also covered in this article by NZ Adviser online.

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Source Agile Finance Radio