Is financial Advice worth it?

Professional advisors can help you navigate the complexities of investing, potentially leading to superior investment returns over time. They can also provide strategies tailored to your financial situation that may result in significant tax savings, allowing you to keep more of your hard-earned money.

Additionally, working with a financial advisor can help you develop a comprehensive plan to protect and grow your wealth, ensuring financial stability for the future. Evaluating these factors will be crucial in deciding whether collaborating with a financial advisor is a wise investment in your financial health and security.

Summary

• On average, financial advice can make people nearly £48,000 better off in pensions and financial assets

• Savers could expect to pay between £1,000 and £2,500 for one-off independent advice on their financial position

• The benefits of advice should incrementally increase over time, resulting in bigger gains

How much is financial advice worth?

Financial advice plays a crucial role in improving individuals' financial security, with research indicating that those who obtain professional guidance are, on average, nearly £48,000 better off in terms of pensions and financial assets when compared to their counterparts who do not seek financial advice.

This insight is derived from a comprehensive report produced by the International Longevity Centre (ILC), which highlights the significance of financial planning in achieving better economic outcomes.

The ILC’s study examined a group of individuals in the UK who sought professional financial advice between the years 2001 and 2006. Over the course of a decade, these individuals experienced an impressive average increase in their total assets, reaching nearly £48,000, when compared with those who did not engage with financial advisors. This substantial financial growth is particularly noteworthy, especially for those classified as having lower disposable incomes, who often face greater challenges in wealth accumulation.

Moreover, the investigation illustrated that the frequency of receiving financial advice was a significant factor influencing the overall financial growth experienced by clients. Those who sought advice on multiple occasions reaped even greater benefits, reinforcing the idea that continuous engagement with financial professionals can lead to improved financial outcomes.

An interesting aspect of the report highlights the exceptional return on investment for financial advice. Over the span of 10 years, the combined financial gains realised by advisory clients amounted to approximately 2,400% greater than the initial costs incurred for the advice received. This statistic underscores the potential long-term value of investing in professional financial services.

The study, which was conducted in partnership with Royal London, methodologically compared the financial statuses of individuals who took advice with those who did not. It meticulously analysed various assets, including pensions, savings, and investments. The research focused on two distinct groups: the 'affluent' category, defined as individuals who perceive themselves as comfortably well-off, and the 'just getting by' group, referring to those whose income is barely sufficient to cover their expenses.

Perhaps one of the most compelling findings of the report was the revelation that individuals in the lower-income bracket derived more substantial financial benefits from receiving financial advice compared to their affluent peers. This suggests that professional financial guidance can be particularly impactful in helping those who are more financially vulnerable navigate their economic challenges and improve their financial circumstances. Overall, the ILC's study illustrates the critical importance of obtaining financial advice, particularly for those seeking to enhance their financial stability and well-being.

The less well-off get greater benefits from advice

The ILC report provided significant insights into the impact of financial advice across different socioeconomic groups, highlighting that the benefits were not limited to wealthier individuals. Instead, it revealed that those classified as "just getting by," often facing financial challenges, experienced a more substantial enhancement in their financial well-being, despite starting from a much lower baseline.

Specifically, the report indicated that, over the course of a decade, the average saver in the "just getting by" group who received financial advice enjoyed a remarkable 24% increase in their pension savings, translating to an additional £35,054. This increase was particularly noteworthy when compared to their counterparts in the same group who opted not to seek financial guidance, who did not experience this level of growth.

For the more affluent group, while the increase in pension savings was less dramatic, it still demonstrated a significant benefit. Affluent individuals who chose to receive financial advice found their pension pots increased by £24,266 over the same ten-year period, resulting in an 11% enhancement compared to those who did not seek advice.

The report delved further into the effects of financial advice on non-pension assets, such as savings accounts and investments. Here again, the benefits were pronounced for the "just getting by" cohort. They recorded a 35% increase in their non-pension wealth, a substantial gain relative to those in their group who did not receive financial advice. In contrast, the affluent advised group experienced a 24% growth in non-pension assets compared to their non-advised peers.

When examining the overall financial outcomes, it became clear that the “just getting by” group that sought financial advice ended up, on average, £50,332 richer than individuals who did not obtain such guidance. Meanwhile, the group of affluent individuals who received advice had a net gain of approximately £43,353 more than their non-advised counterparts.

In conclusion, the report highlighted that the average total benefit of receiving financial advice over a period of ten years amounted to £47,706. Notably, a significant portion of this financial growth can be attributed to the remarkable increases observed in pension savings, underscoring the critical role that financial advice plays in enhancing overall financial stability and growth for individuals across the economic spectrum.

Does ongoing advice add more value

The report provides compelling evidence of a substantial increase in wealth attributable to one-time financial advice, but it also emphasizes the even greater advantages of pursuing ongoing or additional advisory services. To draw its conclusions, the report compared two distinct groups of individuals: those who received financial advice only once at the beginning of the decade, and those who sought further advice two years before the end of the decade.

The analysis revealed that, on average, individuals who pursued additional advice over the course of the decade were found to be 61% better off when considering their overall wealth growth. However, it is important to approach this figure with a degree of caution. The report does not account for the initial wealth levels of the two groups, which introduces potential bias. It remains plausible that individuals with higher initial assets were more inclined to seek ongoing financial advice, potentially skewing the results.

Moreover, the study does not provide specific details regarding the frequency and depth of additional advice received throughout the decade. Despite these limitations, the evidence presented strongly indicates that there is a measurable and significant benefit associated with obtaining continuous advisory support over time. This suggests that individuals seeking financial expertise on a recurring basis may experience more pronounced and lasting improvements in their overall financial well-being.

How does the value of financial advice compare to the cost?

The majority of savers participating in the study indicated that they sought financial advice from an independent financial adviser (IFA). This raises the question: what would it cost individuals in a similar financial position today if they were to seek such guidance?

To provide context based on predetermined scenarios outlined in the ILC report, we assume that the average individual categorised in the "just getting by" group possesses a pension pot valued at approximately £140,000, alongside additional savings that may vary depending on personal circumstances. Conversely, an average person identified as "affluent" typically has a pension pot of about £230,000, as well as at least £50,000 in other easily accessible liquid assets.

Given these financial profiles, savers can anticipate a one-time fee for independent financial advice ranging anywhere from £1,700 to £2,500. As a general rule, as an individual's total assets increase, so too does the cost of obtaining financial advice. This pricing structure reflects the complexity and the level of service required, which often dictates the adviser’s fee.

The adviser’s fee usually encompasses not only the provision of tailored advice but also the selection of appropriate financial products that align with the client’s specific circumstances, goals, and risk tolerance. Additionally, the fee accounts for the execution of all necessary actions required to implement the advice effectively.

If we assume an average one-off advice fee of £2,000 and consider the average financial benefit derived from such advice, which is estimated at £47,706 over a span of ten years—according to findings from the ILC report—we can conclude that securing financial advice yields a substantial return on investment. Specifically, this guidance would generate value nearly 24 times greater than the initial cost incurred, resulting in an impressive net annual benefit of around £4,570 for the individual over the course of that decade. This illustrates the potential long-term advantages of professional financial guidance, making it a worthwhile consideration for anyone navigating their financial future.

The long-term value of financial advice

The ILC study focuses on a specific decade and evaluates the value of financial advice within that timeframe. However, it’s important to recognise that the impact of financial advice spans a much longer duration. Most individuals invest in their pension pots over the course of their entire careers, which can stretch for 40 years or more. As these savers approach the end of their careers, they will need to consider how to secure a stable income for their retirement years, which may last an additional 20 to 30 years.

The long-term benefits of financial advice are significantly enhanced by the power of compound interest and the potential for investment growth. This means that the positive effects of sound financial advice can accumulate over time, leading to a substantial difference in financial well-being compared to those who choose to forgo such guidance. Those who receive financial advice are likely to experience a pronounced advantage as their wealth grows, particularly during the accumulation phase.

Additionally, the ILC report primarily examines the 'saving up' stage of financial planning, neglecting the critical phase known as 'decumulation.' This is the period in which retirees start drawing down their pension pots to provide for their living expenses. It is essential to seek professional financial advice regarding how to effectively withdraw income from retirement savings, as the choices made during this transition can have lasting implications for financial stability over the next two to three decades. Mistakes made in this phase can be difficult, if not impossible, to rectify later on.

Consequently, the years leading up to retirement, as well as the decade immediately preceding it, are among the most pivotal times for individuals to seek out financial advice. Engaging with a financial adviser during these crucial moments can help ensure that retirees make informed decisions, thereby enhancing their ability to enjoy a secure and comfortable retirement.