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The value of financial advice
Those who received financial advice in the 2001-2007 period had accumulated significantly more liquid financial assets and pension wealth than their unadvised equivalent peers by 2012-14.
‘The Value of Financial Advice’, produced by ILC-UK with the support of Royal London, analyses data from the largest representative survey of individual and household assets in Great Britain, the Wealth and Assets Survey. It finds that, even allowing for the fact that some groups are more likely to seek advice than others, those who received financial advice in the 2001-2007 period did better than an equivalent group who did not receive such advice, by 2012-14.
The report examines the impact of financial advice on two groups, the ‘affluent’ and the ‘just getting by’. The ‘affluent’ group is formed of a wealthier subset of people who are also more likely to have degrees, be part of a couple, and be homeowners. The ‘just getting by’ group is formed of a less wealthy subset who are more likely to have lower levels of educational attainment, be single, divorced or widowed and be renting.
‘The Value of Financial Advice’ finds that:
The ‘affluent but advised’ accumulated on average £12,363 (or 17%) more in liquid financial assets than the affluent and non-advised group, and £30,882 (or 16%) more in pension wealth (total £43,245)
The ‘just getting by but advised’ accumulated on average £14,036 (or 39%) more in liquid financial assets than the just getting by but non-advised group, and £25,859 (or 21%) more in pension wealth (total £39,895)
The report also finds that financial advice led to greater levels of saving and investment in the equity market:
The ‘affluent but advised’ group were 6.7% more likely to save and 9.7% more likely to invest in the equity market than the equivalent non-advised group
The ‘just getting by but advised’ group were 9.7% more likely to save and 10.8% 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 earn £880 (or 16%) more per year than the equivalent non-advised group
The ‘just getting by but advised’ group earn £713 (or 19%) more per year than the equivalent non-advised group
The report found that 9 in 10 people are satisfied with the advice received, with the clear majority deciding to go with their adviser's recommendation.
Despite the advantages of receiving advice, only 16.8% of people saw an adviser in the years 2012-2014. Indeed, ‘The Value of Financial Advice’ finds that even amongst those who took out an investment product in the last few years, around 40% didn’t take advice, rising to 78% of people who took out a personal pension.
After controlling for a range of factors, ‘The Value of Financial Advice’ concludes that the two most powerful driving forces of whether people sought advice was whether the individual trusts an Independent Financial Adviser to provide advice, and the individual’s level of financial capability. Therefore, the report makes a series of recommendations to raise demand for financial advice including:
Using advice to support the auto-enrolled – duty on employers to ensure staff can access the best information and advice on their pensions
Mandating default guidance for those seeking to access their pension savings – to ensure people can get crucial information in a complex marketplace and avoid worst outcomes
Helping to create informed consumers through continued development and roll out the pensions dashboard
Ensuring regulators continue to place emphasis on access to independent financial advice
Ben Franklin, Head of Economics of Ageing, ILC-UK said:
“Our results show that those who take advice are likely to accumulate more financial and pension wealth, supported by increased saving and investing in equity assets, while those in retirement are likely to have more income, particularly at older ages.
But the advice market is not working for everyone. A high proportion of people who take out investments and pensions do not use financial advice, while only a minority of the population has seen a financial adviser. Since advice has clear benefits for customers, it is a shame that more people do not use it. The clear challenge facing the industry, regulator and government is therefore to get more people through the “front door” in the first place.”
Source: A Research Report from ILC-UK
The cost of delay
Let your savings snowball
Making an early start is the most important factor in saving for the future.
Saving for the future can often come well down the list of financial priorities, behind paying off debts, paying a mortgage and financing a child’s education. However, the longer you put it off, the more you’ll miss out on the power of compounding returns.
Einstein reportedly stated: “Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn’t... pays it.” Most people appreciate the importance of paying off debts to avoid the interest rolling up. But the power of the compounding concept is often overlooked by those who need to create wealth for the future.
The secret of investing success lies in the way that investment returns themselves generate further gains. Reinvesting any income generated, rather than paying it out, means that returns in the next period are earned on the invested sum plus the previously accumulated income. It’s very much like a snowball effect: once it’s rolling, the more snow it collects and the bigger it gets.
Reinvesting dividends paid from company shares provides a powerful example of how compounding can boost investors’ total return. Figures from Barclays show that a notional £100 invested directly into UK shares at the end of 1945 would now be worth £10,933 in nominal terms, without the income reinvested; but would have grown to £238,690 if the dividends had been reinvested in more shares.1 However, past performance is not indicative of future performance.
The chart below illustrates just how much difference compounding could make when someone starts saving earlier. Daisy starts saving £200 a month when she is 25; Ken saves £400 a month from the age of 45. In total, they both save £96,000 by the age of 65. However, assuming an illustrative growth rate of 5%, Daisy ends up with almost twice as much as Ken due to 20 extra years of compounding returns.
Of course, these figures are examples only. The level of returns in both scenarios cannot be guaranteed and would depend on the performance of the underlying investments. They do not take into account the impact of charges and taxation which would also reduce the value of an investment.
Younger generations may nowadays face even greater financial challenges, but they have got time on their side. That’s why it also makes sense for families thinking about intergenerational planning to help children and younger adults make an early start by saving money through Junior ISAs, ISAs and pensions.
If you are telling yourself that you will put aside money for tomorrow ‘when I can afford to’ or ‘when I’m making more money’, you risk leaving it too late. But by getting into the savings habit earlier, committing to a plan and giving your money the chance to grow, a more secure financial future remains within reach.
Source: St James Place
Which Pensions
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