The real value of advice
Good advice is valuable.
The right words of advice – whether it be from friends or family, business mentor, sports coach – can have lasting impact on the way we lead our lives, manage our businesses.
The same holds true for financial advice. The right advice can deliver more than just a better investment outcome. Think peace of mind heading into retirement, lower stress in a relationship and possibly even higher levels of happiness.
The need for advice ought to be beyond dispute. Yet it is not.
The value of advice ought to be well understood. Yet it is not.
With an ageing population and growing pool of superannuation assets the financial advice industry ought to be thriving. Yet it is not.
The Financial Services Council recently released a research report titled the Future of Advice prepared by the independent research and actuarial firm Rice Warner. While the report is aimed at advancing the public policy debate on the financial advice industry it contains some strong learnings for individual investors.
The report rightly identifies the challenges consumers face in managing their financial position and points to the need for advice in order to maximise income and avoid financial difficulties. A task made harder by the interplay of tax, super and social security regimes.
The research has modelled a range of cameos to assess the value of advice and estimates that those who obtain advice accumulate more than three times more assets after 15 years than those who make their own decisions (including doing nothing)".
That is a significant financial payoff and is in line with proprietary research by Vanguard titled Adviser's Alpha that independently researched the impact of advice and estimated the value about 3% in improved net return.
The value of the advice is not always for the wealthy or in the complexity. The Rice Warner paper says the greatest cumulative increase in funds at retirement when advice is taken at younger ages comes from asset allocation advice. Regardless of wealth level for an individual aged 40 about half the value of the advice is derived from simple advice in respect of savings.
Indeed individuals who are in the low socio-economic wealth bands are expected to gain more from advice than those who are wealthy. That reflects the tendency of those individuals to save less of their disposable income and allocate assets to safe but low-yielding asset classes such as cash and term deposits.
The Rice Warner research makes a strong case for the tangible, financial benefit of getting advice – with one important caveat. Costs matter.
The modelling of the impact of advice was done on a before-fees basis because fees vary widely across the industry. Importantly, the research showed that advice fees of 1% of a portfolio value would likely be a "net detractor" in purely financial terms.
There is considerable public policy discussion around the so-called "advice gap" which refers to the gap between those who could benefit from advice and those who actually receive it. During the Royal Commission into Financial Services poor and unethical practices within the industry were publicly exposed and as a result there has been considerable restructuring of the advice industry with major banks withdrawing as major players in the market along of with the number of individual financial planners falling as some choose to simply exit the industry.
Not surprisingly after the revelations from the royal commission the regulatory focus was heightened around investor protection. The financial planning industry today looks quite different today to five years ago – conflicted remuneration has been banned, a best interest's duty introduced and educational and professional standards are in the process of being lifted.
But the very measures meant to protect consumers are impacting the cost and complexity of providing advice and the Rice Warner report calls out the fundamental problem that the law regards most financial advice as complex and risky for consumers. So "simple advice has the same complex and lengthy processes as high-risk advice," according to Rice Warner.
Consider the components that are required to provide a financial plan:
Fee disclosure statement
Statement of Advice
Record of advice
Opt-in requirement (where this an ongoing fee arrangement)
The result is that the complexity of delivering advice has driven up costs and as a result it is the middle ground where the "advice gap" has widened and that in part is because the cost of delivering the advice is much higher than consumers are prepared to pay.
The FSC/Rice Warner study has recommended a new model with the aim of simplifying the advice delivery structure and making it more affordable.
The proposal is separating Personal Advice into two categories – simple personal advice and complex personal advice.
Simple advice would deal with well understood financial needs and products. Complex personal advice would cover things that are known to be complex and/or risky but also include areas where specialised advice skill are required such as derivatives or self-managed super funds.
Whether the FSC/Rice Warner proposal is the best solution is up for debate with regulators, policy makers and the industry. ASIC has kick started this discussion in asking for feedback on the roadblocks towards the delivery of good-quality affordable personal advice. What is clear though is that it is a debate worth having in order to ensure mainstream Australian investors can get both the right level of advice at an affordable price and the long-term benefits that good advice can provide.
An iteration of this article was first published in The Age / Sydney Morning Herald on 19 Jan 2021.
By Robin Bowerman
Head of Corporate Affairs, Vanguard Australia
25 Jan, 2021