The real benefits of good financial advice revealed
Created On: 21/03/2022
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.
With an ageing population and a 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 paper titled the Future of Advice prepared by actuary Rice Warner.
While it is mostly aimed at advancing public policy debate on the financial advice industry, it contains some strong learnings for individual investors.
The report identifies the challenges consumers face in managing their finances 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 estimates that those who obtain professional financial advice accumulate at least three times more assets after 15 years than those who make their own decisions.
The paper says the greatest cumulative increase in funds at retirement is when advice is taken at a young age. Regardless of wealth level for an individual aged 40, about half the value of the advice is derived from simple guidance in respect of savings.
Individuals who are in low socio-economic wealth bands 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.
There is considerable public policy discussion around the so-called “advice gap,” which refers to the difference between those who could benefit from advice and those who actually receive it.
During the Royal Commission into Financial Services many unethical practices within the financial advice industry were laid bare. Not surprisingly, after the revelations, the regulatory focus was heightened around investor protection.
The result is the financial planning industry today looks quite different than it did five years ago – conflicted remuneration has been banned, a best-interests duty introduced and educational and professional standards are being lifted.
However, the measures meant to protect consumers are impacting on the cost and complexity of providing advice. The result is that costs have been driven up and the “advice gap” has widened, as the price of delivering services is higher than most people are prepared to pay.
Rice Warner recommended a new model with an aim of simplifying advice delivery and making it more affordable. The proposal separates personal advice into two categories – simple and complex.
Simple advice would deal with well understood financial needs and products. Complex advice would cover things that are known to be complex and/or risky, as well as areas where specialised advice skill is required, such as derivatives or Self-Managed Super Funds.
Whether the proposal is the best solution is up for debate by financial regulators, policymakers and the financial planning industry.
The Australian Securities and Investments Commission has kick-started discussions by asking for feedback on the roadblocks to delivering good-quality, affordable advice.
The debate worth having in order to ensure investors can get both the right level of advice at an affordable price as well as the long-term benefits that good advice can provide.