Golfdale Consulting

Financial Literacy Month Is Around The Corner: Have You Thought About The Value of Advice?

We hire professionals to help us with virtually every aspect of our lives, and our financial affairs should be no different.

My husband and I met with our financial advisor yesterday. I am always amazed how much I learn and am nudged to remember in these meetings, even though I know quite a bit about personal finance myself. I closely work with both the investment funds industry and the life insurance industry. I actively participate in industry groups, consultations, and follow financial and personal finance news and developments daily. This gives me just enough knowledge about financial services to know that I can not advise myself. Both my husband and I are well educated professionals, but we couldn’t navigate ourselves into a comfortable retirement without the help of our advisor. Our advisor lives and breathes this stuff while we go on with our daily lives and careers.

However, with all the hot talk about mutual fund fees, cost and compensation of advisors, it is easy to give up and be disenchanted with the whole lot. Should I just do my investments myself? Is a financial advisor really worth the cost?

Speaking of which, how much does it actually cost to invest? This last question is going to be much easier to answer in Canada once the industry fully implements the second phase of the Client Relationship Model (CRM2). CRM2 introduces new reporting requirements to clients about the costs and performance of their investments, and the content of their accounts. You can also simply ask your advisor about the cost of investing and the cost of his/her services – this is a trust relationship and being open and honest is helpful. If cost is a concern, your advisor might be able to offer you some solutions that are less costly than others or can explain to you why the cost of the product or service he/she is recommending might be worth it.

When it comes to the first two questions, there are many opinion-based surveys that suggest the fees you pay are worth the advice you get. Just google it – I did and found pages and pages of links to various studies, polls and white papers. For example, recent research by the Conference Board of Canada, Antunes, Pedro, Alicia Macdonald, and Matthew Stewart: Boosting Retirement Readiness and the Economy Through Financial Advice. Ottawa: The Conference Board of Canada, 2014, explores the links between financial advice and increased savings, potential economic output, and retirement readiness. There are also many studies commissioned by the industry. An interesting one is a White Paper by Vanguard – Putting a value on your value: Quantifying Vanguard Advisor’s Alpha. While the paper focuses on Vanguard’s advisors, the insights apply more broadly.  In its White Paper, Advisor Value, ING offers similar insights and quantifies the benefits of working with a financial advisor.  It is fair to say that these papers may be viewed as biased as they benefit from the advice channel.  Nevertheless, the findings are based on facts and hard to refute.  There are a lot of articles that mount arguments against having an advisor as well, most of them citing cost concerns. But cost and structure of cost of investment products vary and you can work with your advisor to find one that fits your needs.

When it comes to empirical evidence on whether financial advice pays off, perhaps the most compelling analysis comes from the Center for Inter-University Research and Analysis on Organizations (CIRANO). In their research paper Econometric Models on the Value of Advice of a Financial Advisor, Professor Claude Montmarquette and Nathalie Viennot-Briot utilized econometric modelling on a significant sample of Canadian households to evaluate the impact of financial advice on the accumulation of wealth. Specifically, the report concludes that there is a tangible positive relationship between having a financial advisor for at least four years and the level of financial assets relative to the equivalent non-advised household. When compared to a similar cohort of participants who had financial advice for 15 years or more, the non-advised had 2.73 times less financial assets.

The CIRANO report is detailed and may be hard to follow for those who are not familiar with econometric modelling. The Investment Funds Institute published a guide to the report,  New Evidence on the Value of Financial Advice, which I found quite helpful and would recommend as a good read.

My personal view is that we hire professionals to help us with virtually every aspect of our lives, and our financial affairs should be no different. While not everyone has complex financial needs, everyone has retirement needs – neglecting them is not a risk worth taking. November is Financial Literacy Month, and it is safe to assume that the financial services community will release many interesting tools and resources to foster knowledge. That’s why November is a perfect time to educate yourself on your need for financial advice.

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