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C & D

Is there Value in Receiving Investment Advice?

The Financial Markets Authority (FMA) has recently released findings from their FMA Colmar Brunton commissioned survey of New Zealanders aged between 60 and 74. The survey was designed to find out how advice had helped them manage their savings.

Of those retirees who had sought professional financial advice, 95% said their adviser was either good, very good or extremely good value. Around 30% said their adviser was very good value.

Retirees were more confident after having done their own research or talked to a product provider. It was found that the retirees were more likely to have a portfolio of shares, bonds and managed funds when they dealt with an adviser. This was not surprising, as investment advisers invariably advocate a portfolio of investments spread across different asset classes.

The survey found that less than 30% of the respondents had sought professional investment advice. The FMA was concerned about a lack of access to advice, and that it was limited to those with substantial sums of money to invest.

Advisers' clients said they had sought help because they received a lump sum. Most had at least $100,000 to invest but almost half had at least $450,000. Advisers told the FMA that it was not viable to deal with retirees with less than $100,000.

We believe the viability issue with those with less than $100,000 primarily relates to fees. Advisers typically charge on a percentage of funds under management. It does not necessarily relate to the amount of time the adviser spends on advising each client. Regulatory costs for the adviser are essentially the same for clients with $50,000 or a multimillion dollar portfolios. The key in being able to offer investment services to potential clients with modest amounts to invest, is to devise a cost-effective investment solution that offers plenty of diversification with top quality underlying investments.

The survey showed unsurprisingly that the clients wanted their advisers to provide guidance on getting better returns.  They said establishing trust was crucial - those who had, were less worried about volatility and more likely to take risk. They also valued the ongoing communication they got from their adviser about their progress towards goals, and their ability to explain concepts to them. More than 90% of advice clients said they had made better decisions because they had had advice.

Advisers surveyed said that they struck problems because clients wanted to invest conservatively and did not understand inflation risk, or that they were likely to have to cover 25 years in retirement. To us, this seems that this is an issue that the advisers may not be addressing in an appropriate manner. They need to explain what levels of investment risk need to be taken to meet the client’s needs, and what level of risk the client can cope with mentally and financially.

Survey respondents said they would be more inclined to use an adviser if they gave a clear list of the services on offer, and details of their fees up front. This is a chicken and egg situation, and what services to offer and the associated fees are really an unknown until after the initial fact finding session with the potential client.

Disclaimer

Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.