Kiwis with advisers end up significantly better off - research

 

5th December 2020

The Financial Services Council of New Zealand recently published this paper (research paper).

It stated a number of areas in which those who used financial advisers were in a better position than those who did not.

One of the findings that advisers in New Zealand and the media have latched onto is: 

                "New Zealanders who receive financial advice end up with around 50% more money in their KiwiSaver (personal                     pension)".

As my wife noted on hearing this: "It's probably because those who use advisers are typically wealthier than those who do not". This is indeed what the paper went on to state. So the massive difference is clearly not down to the skills of the advisory community.

So the headline-grabbing figure is therefore pretty misleading. This may cause many to dismiss the whole report as propaganda. But hang on a minute.

The impact of using advisers turned out to be far more modest. The average returns over the last five years (excluding the value of their home) by those who did not use advice was 8.9%. Whereas the average return for those who did use advice was 12.9%.

That might not sound like much of a difference, but it means that if both groups invested a thousand dollars a year for five years the first group would end up with $6,500 while the second group ends up with $7,300. Twelve percent more. 

Looked at another way, if you were saving to pay off the principal on an interest-only mortgage of $250,000, saving $12,000 a year, the unadvised group would take over eleven and half years to reach their target. The advised group would take a fraction over ten years. 

Saving about 18 months in interest is pretty significant to most people. 

The report illustrates this another way:

        The research highlighted an average 4% increase in investment returns between those that took professional financial advice and those that didn’t. To see how that additional percentage return grows over time in dollars and cents, CoreData modelled three scenarios for younger (age 25), middle-aged (age 40) and pre-retiree (age 55) based on the same starting balance, deposit and withdrawal each year.

        This model shows that younger New Zealanders starting with a balance of $16,830 and depositing

        $2500 every year would have earned an additional $1.5m on their investment if they sought help and professional financial advice. 

        Even starting later in life at age 55, more initial savings in the investment pot sees advised earn close to $2m more in their investment and those starting at 40 years old could see a massive $3m in additional investments.

The report also goes on to highlight how respondents who used advisers were typically more confident about their situation and this had a major impact on their wellbeing. 

So while they may not be investment geniuses, the advisers are clearly providing a valuable service. Why do so many people therefore fail to use them?

There is no question that the industry has a tarnished history, with unscrupulous participants fleecing their clients and walking away with significant income.

This in turn led to widespread abolition of commission in many jurisdictions. Now you must pay a fee. This fee is also an oft quoted deterrent. 

But why should that be? 

Regulation in many countries mean that the sharks find life a lot harder (and so have probably moved on to other industries) and as for the fee part, it does seem strange that with demonstrable value such as this report shows, people who can afford it might well still say: "It costs too much, I'll just do it myself".

I could say the same about some repair work in the house. Sure my attempt would probably be ok, but the finish or other aspects would probably irk. An attempt at plumbing doesn't really bear thinking about!

However here we're talking about the opportunity to become mortgage free earlier. That's life-changing. We're talking about improved wellbeing. Isn't that basically priceless? 

If it can be shown that the benefits of paying a fee can significantly improve your lives in these ways, is it still not worth it?

Dunotter disclosures

Disclaimer: This communication is purely meant as information for general interest. It is in no way to be taken as financial advice or relied upon in any way for investment decisions.