A question I am regularly asked is: what is the point of a financial adviser? Some advisers may be appalled to read this, but it is a common question before consumers consider consulting one.
If consumers cannot see the point or value of a financial adviser, they will never use their services. To be fair, there really is no point in anyone seeing a financial adviser unless that adviser can, with at least some confidence, provide evidence that the consumer will be materially better off as a result.
Financial advisers understand implicitly the value of the advice they offer to clientsI was reminded of this question recently with the publication of The Value of Financial Advice report from the International Longevity Centre (ILC-UK), supported by Royal London. ILC-UK looked at detailed survey data covering 5,000 people over a near 20-year period and tried to answer this question.
Financial advisers, I am sure, understand implicitly the value of the advice they offer to clients. It goes to the core of what they do.
They do, after all, offer many roles. They can be problem solvers, financial crisis management consultants, later life inheritance tax advisers, young family protection helpers and perhaps even a shoulder to cry on – at least financially – during a messy divorce.
Some clients require all of these roles at various times and while these are all valuable roles, the client also needs to see the financial value of the advice they are receiving and why they should pay the adviser’s fees.
Some material benefit must be received. Whether that be a problem solved or a financial crisis is immaterial; the value of the advice must be clear, otherwise there was no point in seeing the adviser.
Many advisers struggle to demonstrate the benefits of their advice clearly, but the strength of the ILC-UK report is in its detailed analysis of the true value, on average, of financial advice.
By comparing the long-term financial performance of advised and non-advised consumers it found:
• "Affluent but advised" clients amassed on average £12,363 (or 17 per cent) more in liquid financial assets than the affluent and non-advised group, and £30,882 (or 16 per cent) more in pension wealth.
• The "just getting by but advised" accumulated on average £14,036 (or 39 per cent) more in liquid financial assets than the "just getting by but non-advised" group, and £25,859 (or 21 per cent) more in pension wealth.
The report also found that financial advice led to greater levels of saving and investment in the equity market:
• The "affluent but advised" group was 6.7 per cent more likely to save and 9.7 per cent more likely to invest in the equity market than the equivalent non-advised group.
• The "just getting by but advised" group was 9.7 per cent more likely to save and 10.8 per cent more likely to invest in the equity market than the equivalent non-advised group.
Those who had received advice in the 2001-2007 period also had more pension income than their peers by 2012-14:
• The "affluent but advised" group earned £880 (or 16 per cent) more per year from pensions than the equivalent non-advised group.
• The "just getting by but advised" group earned £713 (or 19 per cent) more per year than the equivalent non-advised group.
I hesitate to say this is incontrovertible proof of the value of professional financial advice, but it looks pretty close to me.
So far so good, but there is a problem: the report points out that more people are failing to get advice even when they need it.
The report found that only 16.8 per cent of people saw an adviser in the years 2012 to 2014. Even among those who took out an investment product in the past few years, about 40 per cent did not take advice, rising to 78 per cent of people who took out a personal pension.
These findings were echoed, worryingly, by the recent FCA initial review of the outcomes of the pension freedoms introduced in 2015. The FCA found, for example, that the number of people taking an income drawdown route with their pension pot – but doing so without advice – had risen from 5 per cent pre-freedoms to 30 per cent post-freedoms.
This implies that nearly one in three people now make some incredibly difficult pension choices without any kind of financial advice. The FCA also found that large numbers of people were taking their pension pot in cash and simply dumping it in a low interest savings account or shifting it into property without considering the consequences.
This is worrying and I hope the two reports provide something of a wake-up call for the government. I am no advocate of the nanny state, but common sense dictates that consumers should be protected, where possible, from making appalling financial blunders and perhaps gently nudged into taking financial advice that could make all the difference to their financial futures and leave them better off.
The value of good advice is evident; the cost of taking no advice is now equally evident too.
Kevin O’Donnell is a financial writer and journalist
