Wouldn’t it be great if you could manage your own money yourself over your entire lifetime? Wouldn’t it be great if you never needed anyone else’s help?
The answer to both of these questions is obviously yes. But the reality is that given the complexity of savings, investments and insurance, you are highly likely to need the help of a professional at some stage, particularly (but not exclusively) when nearing retirement.
Everyone’s financial situation, goals, needs and constraints are different. People also have different levels of financial literacy – some people have a great understanding of financial concepts and can manage their own money very well while others struggle for a variety of reasons, including a lack of time or even lack of interest. Complicating this is the fact that managing money can be complex. Superannuation, for example, is a political football. The rules around how much you can tax-effectively contribute and when and how you can access it frequently change as do the rules around qualifying for social security benefits. These complexities feed consumer confusion, distrust and stress which can profoundly impact lives in different ways. Financial advice from professional financial advisers helps people to navigate these complexities, providing them with solid financial plans, the foundations upon which both individual and family needs can be met.
The Banking Royal Commission
But there’s another problem, and it’s a big one. The Banking Royal Commission (the Royal Commission) has further undermined consumer trust in financial advice. In this way, in our opinion, it has done Australia a grave disservice – because, as already established, people need financial advice in order to navigate the complexities that have been created by successive Governments themselves. The Royal Commission did expose, as you might expect it to from its brief (an investigation into misconduct, not into conduct) some examples of poor financial adviser behaviour and poor outcomes for some financial advice clients. But there are currently around 28,000 financial advisers registered on the ASIC Financial Advice Register and therefore the vast majority were not found wanting by the Royal Commission.
At the height of the Royal Commission, we commissioned research, undertaken by CoreData, which looked into a number of financial advice issues.
What’s the value of advice?
The research, which resulted in our Value of Advice 2018 report, was based on a survey of 946 people, including those who did and those who did not receive financial advice, between 14 August 2018 and 3 October 2018. We asked people who did not seek advice why they didn’t, and the top three answers were:
- “I can manage my own finances” – Nearly half (46.9 per cent ) don’t seek advice because they feel they can do it themselves
- “It’s too expensive” – Almost a third (31.1 per cent) thought financial advice is too expensive
- “I don’t think financial advisers are trustworthy enough” – Just over 1 in 10 (13.5 per cent ) felt they couldn’t trust a financial adviser
However, despite these misgivings, the vast majority of people who did not receive financial advice (71.1 per cent) said they would consider it. This is interesting because it suggests that they may be struggling without it, may realise the complexities of managing their own money could (perhaps as retirement approaches) become beyond them, or they may see, despite their misgivings that there is value in financial advice, or perhaps all three.
The other interesting finding was that people who receive advice reported feeling less stressed about money. In answer to the question: How often do you worry about money?, less than a quarter (23.5 per cent) said ‘at least weekly’ compared to almost half (47.2 per cent) of those without an adviser.
Advice in action
Financial advisers see the value of the work they do every day with their clients in the outcomes they are able to achieve for them. To help others understand this value, CoreData modelled three scenarios which reflect the financial circumstances of everyday Australians, as informed by our research and by Australian Bureau of Statistics (ABD) data. The scenarios were:
- The Big Check-Up: A couple in their mid to late 50s, approaching retirement
- Loss of a Partner: A widow in her early 40s, beneficiary of her late husband’s insurance policy
- Upstarts: A couple in their early 30s, looking to get a head start in securing their financial future
A highly qualified and experienced financial adviser was then asked to provide the kind of ‘financial advice’ that might apply in each of those scenarios. Finally, a paraplanner working with the financial adviser modelled the three sets of scenarios using a financial advice software program to demonstrate likely outcomes, with and without financial advice.
The research and the scenarios demonstrated that there are three key benefits to financial advice – financial, emotional and behavioural – and they all play a vital role in improving financial outcomes and therefore quality of life.
Financial advice leads to better financial outcomes. In a general sense, this could mean more income in retirement and/or lower interest payments on loans, lower tax bills, enhanced net wealth and the ability to face unexpected life events.
More specifically, in the case of our Big Check-Up couple, our scenario demonstrated that even a couple who were quite late to receive advice could be substantially better off as a result of that advice – potentially having 24 per cent more money in retirement and paying 35 per cent less tax over a lifetime than if they had not received advice.
What is less known is the emotional benefits of financial advice. A solid financial foundation provided by a good advice relationship leads to greater peace of mind and greater confidence in terms of being prepared for key life events, such as retirement.
Our research demonstrated the clear and significant emotional benefits emerging from the advice experience. Eight in 10 (82.7 per cent) of advised clients said they are well or very well prepared for retirement compared to just a third (33 per cent) of people who do not receive advice. Most (79.4 per cent) advised clients also said that the financial advice relationship has given them greater peace of mind.
Our Loss of a Partner scenario demonstrated that our widow would be better off financially if she took advice, in that she would have twice as much money at retirement and 30 per cent more income over a lifetime than if she did not. But she would also have the support of an adviser at a time when she needed it most.
One of the less spoken about roles of advisers is the financial counselling and coaching they do with clients throughout life’s journey, including marriage breakdowns, births, deaths, retirement, redundancy and other significant events.
Financial advice also helps people change their behaviours so that they take better control of their finances. This includes helping them to control their spending, manage debt and maintain good savings habits.
More than half (54.9 per cent) of the people surveyed who have advisers said they now save more as a result and 60 per cent said they are more prepared to handle sudden one-off costs. More than half (50.2 per cent) of these people said they could cover living expenses for six months or longer if they were suddenly unable to work whereas only around a quarter (26.2 per cent) of those who did not have a financial adviser said the same thing.
While the financial results modelled for the Upstarts showed that a young couple could have 27 per cent more wealth at age 61 and a better return on investment if they took financial advice, the behavioural impact on them would likely be just as important. It would help them to take control of their finances early on and adopt longer term structural habits that ultimately lead to better financial outcomes.
All in a day’s work
Still not clear on what financial advisers actually do? Here’s a snapshot.
- Deliver a comprehensive financial plan tailored to the individual’s circumstances, financial and personal objectives
- Track client progress towards goals and hold them accountable
- Adjust financial plans and life insurance arrangements in line with changing needs, goals and lifestyle
- Help clients improve their financial decision making and behaviours
- Enhance client financial awareness and literacy
- Review and adjust the client’s risk profile to ensure asset allocation remains appropriate to changing needs and objectives
- Review investment asset allocation and performance and bring asset allocation back in line with target asset allocation and strategy
- Review and update beneficiary nominations and asset ownership structures to ensure a client’s estate intentions are appropriately adhered to
- Identify other issues such as the need to review wills, powers of attorney, tax planning, aged care
Financial advisers not only develop client specific financial plans that help their clients grow, manage and protect their wealth, they also help clients understand the discipline of maintaining, reviewing and sticking to that plan. And importantly, financial advisers help clients by holding them accountable for their own financial future.
Philip Kewin is CEO of The Association of Financial Advisers (AFA), www.afa.asn.au.