Financial advice shouldn’t be measured in dollars alone

The November 2018 Grattan Institute report, ‘Money in retirement – More than enough1’ claims that retirees have more money than they need, partly because superannuation businesses and associations scare them into investing too much into super. Apparently, these groups’, “excellent marketing skills” are the reason for retirees having ‘more than enough’ money.

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While some people may think excellent marketing lies at the core of why people invest in super, we suspect the reasons are a little broader than that. The fact is, our clients value the financial advice we provide. We never hear our retiree clients say, “We have too much money, you scared us into investing too much into super”. Instead our clients tend to say, “We are happy you showed us how much we would need to save so we could have peace of mind and live the lifestyle we wanted in retirement.”

This commonly heard sentiment is what we consider to be the ‘value of advice’. Our business is oriented around achieving this for clients – it is not about fear-driven asset-gathering. There is no set dollar amount that means a client will be happy in retirement – it’s different for everyone. Just as people who are working earn and spend vastly different amounts, so do retirees.

ASFA amounts are a rough guide – not a goal

The Association of Superannuation Funds of Australia (ASFA) regularly publishes the amount of money they believe a retiree needs to have an ‘adequate’ and a ‘comfortable’ standard of living. These amounts were criticised in the Grattan Institute report as being overly generous, yet they are reasonably based on how much goods and services cost. The ASFA amounts are an attempt to show roughly how much money people will spend in retirement. ASFA also releases figures on the amounts of money retirees who are over age 85 will need, unsurprisingly these amounts are lower because they account for the fact, that on average, spending declines as people get older. A caveat to the general rule that spending declines with age is that medical expenses tend to increase – and depending on what the ailment is – can rise significantly.

Money kept in reserve for an emergency provides a benefit to retirees – even if it’s never spent

The dread of not having enough savings to quickly access healthcare is a real fear for many and one that is not lessened by believing public healthcare will be the solution. Waiting lists for operations that commonly affect older people, hip replacements and the like, are long and the thought of living in pain while on some seemingly interminable list is something most retirees like to plan to avoid if it’s financially possible.

In a similar fashion, people like to know that if unexpected damage occurs to their property they will have enough money to fix it. No-one likes to live knowing that they have no emergency backup. People who are working are encouraged to have at least six months’ worth of income saved – there’s no reason retirees should be less prepared for emergency spending situations.

Other than peace of mind – what other benefits do people gain from financial advice?

There are several research studies that attempt to quantify the benefit people receive from financial advice, but two that we find informative are Vanguard’s ‘Putting a value on your value: Quantifying Vanguard Adviser’s Alpha – July 20182’ and Morningstar’s ‘The value of a Gamma-Efficient Portfolio – October 2017.3’ Morningstar’s study finds that the ‘average’ investor will benefit from working with an adviser mainly because of the adviser’s services in relation to building and monitoring an investment portfolio.

Advisers tend to add value intermittently – not continually

The study also finds that for many people, “…reaching financial goals is more important than being rational or investing optimally”. This seems quite odd at first glance, but it recognises that behavioural coaching, rather than superlative investment acumen, can deliver greater benefits to clients. This makes sense and confirms what our advisers tell us. Clients often panic when their investments decline in value and without the coaching of a financial adviser they may make a poor, short-term decision to sell their investments and crystallise their losses. Rebalancing is another area the study found an adviser can create value for clients. An adviser will take a dispassionate view with an eye on the long term, which can be difficult for clients who are emotionally attached to certain investments owing to past experiences (both good and bad).

Turning now to the Vanguard study, the key finding is that the bulk of value an adviser can add comes from both peace of mind – which is very hard to quantify but is nevertheless ‘real’ and then from behavioural coaching. The Vanguard study makes the point that this value is very likely to be delivered intermittently rather than continually. This is because an adviser may only prevent a few irrational investment choices over many years, but the benefit to the client that stems from avoiding these poor decisions can be significant.

The two studies also mention that an adviser delivers significant value from effective implementation and cost control. People who go it alone and don’t use an adviser are unlikely to be as skilled at comparing the costs and advantages of different products and investment implementation solutions.

Value is in the eye of the beholder

The Grattan Institute report has certainly sparked a debate about how much people need in retirement, however, by focusing on dollar outcomes it has missed the important point which is that people like to consult financial advisers who can help guide and reassure them that their lifestyle goals are achievable and sustainable. This is what clients seek and see value in – not the achievement of reaching ASFA’s ‘comfortable’ retirement level.

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1 Money in retirement: More than enough - Grattan Institute
2 Vanguard Adviser's Alpha overview
3 The Value of a Gamma-Efficient Portfolio - Morningstar