If something cannot be detected by any of the 5 human senses does that mean it lacks value?
Society today has access to a vast amount of information on any given subject. This availability has its pros and cons. The good point is that consumers could make more informed decisions and choices. They could get better value for their money by getting manufacturers to adapt the products they want or to provide better/more services.
However, information published in the mainstream media may not have as its goal the edification of their readers. In a cutthroat publishing world the be all end all is the # of eyes on a given article. It is quite possible that accuracy is sacrificed for the black bottom line. Still these snippets can be the starting point for useful discussion on certain topics.
One such topic in the financial industry is a question around the value of working with a financial advisor/planner. Are the costs associated with working with an adviser justified? Is there value for the money ?These questions often come out in workplace conversation and often the conclusion is to cut out the middleman and go the do it yourself route. There is a wide swath of public opinion that gives financial professionals an automatic bad rap. Media focus on ne’er do wells don’t help either. A majority of the individuals in publicized cases were not licensed. They were, therefore, not subject to any regulatory oversight.
Many studies have been conducted by various foundations. They interview investors and ask questions to discover their view of the benefits of working with a professional. These studies have shown that across all age groups from 20s to late 50s that advised households have a higher net worth than non advised households. I say net worth for a very important reason. Net worth is your assets minus your liabilities. Your debts and whether you productively manage them will definitely impact your overall financial health.
What are the factors that cause advised households to be wealthier than non advised households? I have adapted a formula from JB of CEG Worldwide LLC. The formula is Financial Independence = investment management + behavioral management + financial planning.
ALL aspects of the equation are necessary to achieve financial goals. However, media attention is mostly focussed on the first part of the equation, with an attack on established investment products and corresponding bias towards new fashionable entrants.
One challenge clients have with placing any value on the second and third parts of the equation are that the values inherent in behavior management and financial planning are intangible and not easily measured. Hence my opening question: Is something immeasurable lacking in value?
Those surveyed began their relationship with their advisor when they had few assets. Therefore one can ignore the potential statistical bias that says the results are due to advisors only choosing people with high net worth to begin with. The long term nature of their relationship leads to the reinforcement of key financial concepts which increases confidence in decision making because of increased financial literacy. Other advantages that lead to increased net worth include the following.
Advised households are encouraged to save for long term goals. They avoid counterproductive financial behaviors, by learning the implications of a single decision on the overall view of their financial situation. Advisors help them develop a plan and hold them accountable in their progress towards the goal. Advisors are able to show advised households the info that is relevant out of the vast amount that is available. These benefits are rapidly becoming the most important in today’s society.
True financial professionals practice in a highly regulated industry. There are indicators that regulation will increase. In my own case every year I must prove that I am fit to be granted my 2 licenses. I am mandated to do a certain amount of continuing education to be granted one of those licenses. I must also sign off on hundreds of compliance questions relating to both my professional and personal activity. Financial planners practice today in an atmosphere of heavy regulatory oversight and the fear of being sued by disgruntled clients. Yet strangely enough, coworkers, in laws, family members and acquaintances freely dispense ‘advice’ about topics they are not certainly licensed or qualified to give. Unfortunately I can give many examples of ‘advice’ from non professionals that resulted in adverse financial circumstances to the client receiving the advice. Indeed, studies have showed that do it yourself investors earned lower rates of return than advised households net of fees.
What is the key question on can ask about the value of advice? It is: As a result of working with my financial planner I am better off because?
- I weathered unemployment, a heavy debt load, or a surprise expense in a positive manner.
- I get my questions answered quickly and objectively, with information not always available to the general public.
- I can make financial decisions with more confidence.
- My financial planner has helped me identify what I value most in life.
- My financial planner has helped me pinpoint counterproductive behavior that may hinder me to achieve my goals.
- I have a professional who always seeks my best interest.
I would not say it is impossible to achieve financial independence on your own. If a person has a lot of time and the interest to do so they could be successful without an advisor. In the near future there will be more disclosure on both costs and advisor’s fiduciary duty to clients. The regulatory discussion is in the beginning stages in Canada. We are following the lead of the UK, Australia, and the US. There is considerable discussion on how proposed regulation will be fairly applied to ALL financial products. Media coverage of fees and ensuing debate will make financial products more competitive. Yet at the same time advice could become less available and more restricted. What are the long term societal consequences of many retirees possibly living in poverty because they had no access to advice? I am in the financial planning practice because at heart I am an optimist. I want to see the positive in people and circumstances. We will see what the future will hold.
Source: The Value of Advice Investment Funds Institute of Canada November 2011