Putting a value upon financial advice is a tough issue for advisers and consumers alike. There is a pretty basic concept as far as “Value” goes for any consumer purchase though which is not a bad starting point, and it can be put into a formula:
“Value = Benefits – Cost“
It should be a given that for a consumer something is valuable if the benefits exceed the cost. Whether that is a lounge suite, a car or professional financial advice the basic formula holds true. The real issue is rarely just cost, no matter how much we hear people debating or questioning it. The issue in financial advice is quantifying the “benefits” part of the equation, because “cost” is totally transparent.
However quantifying the benefits (turning them into a tangible dollar value) is not strictly necessary either as a simple example of pure “advice” where the value is rarely questioned shows.
Consumers routinely pay several thousand dollars to an estate planning specialist for advice on how to keep their assets from prying hands. The cost is explicit, the ultimate benefits easily understood by the consumer, and an assessment of “value” is easily calculated. To the consumer they have exchanged $3,000 (say) for advice on how to keep $1,000,000 in assets away from future prying fingers. There is clear value as the benefits obtained from the advice far exceed the cost. Control of the million dollar estate is the benefit…and that is worth way more than the $3,000 (or whatever) cost.
In financial services the benefits obtained from the advice are difficult for many advisers to articulate and are actually often quite subjective – the value of the same broad plan for 2 consumers with the same circumstances will often be determined differently by those two consumers. That is; value is different for each of them, and therefore defining value generated falls into the too-hard-basket. After all, we are usually talking about “probable benefits” anyway which does make it difficult. Probably you will receive this type of result by investing this way. Probably you will receive that type of benefit IF that risk event happens. Probably, probably…. and as a result the “value” is often questionable in consumers minds.
With little research available in NZ we need to look overseas to provide some examples. In Australia there has been a series of studies on the value of advice, particularly with a view to trying to quantify the value to a consumer for various financial services. This included services delivered with and without advice. The mere provision of simple tools (e.g. online calculators) costs relatively little to deliver to consumers as we’d expect. Consumers obtaining single issue solutions (e.g. advice on workplace super scheme options) typically paid $250-$1,000 for that advice. Those seeking more comprehensive financial advice (e.g. annual full advice plans) faced fee levels ranging from $1,500 to $20,000 for advice apparently. Handy information, though not specific enough for most consumers, but the wide spread on the numbers reflected different adviser business models, or a significant disparity in value delivered.
So there is the first part of the problem in valuing professional advice. There is such a range of delivery methods and cost structures that there is no possible way a consumer could compare them rationally given their limited understanding of those differences. They typically cannot value personalized full advice unless they understand what makes it different to other types of “advice”. Without that understanding an adviser is firstly competing against a Google search and consumers can only compare costs.
The second element is being able to explain those benefits that will be derived from the advice. A graphic example came from some different Australian research. It found that the preparation cost for a typical planner preparing & presenting comprehensive advice was just over $3,000 to deliver. Unfortunately the clients placed a value of only about $300 on it. A massive difference between actual cost of delivery and its perceived immediate value. Why? Because the clients couldn’t see the benefits. At the very least however financial advisers should be conveying the value of providing increased probability of success. Most consumers know that if the do a bit of planning they will improve their own chances of success, and most accept that qualified coaching and mentoring on top of the plan will increase the probability further still.
Back to the issue of consumers cost expectations versus the actual cost of delivery of good financial advice though and what was perceived as valuable to consumers. There were the expected contenders such as budgeting, tax management issues, debt re-structuring, cash flow management, maximizing government benefits, life insurance and so on that presented value to some degree. There were some slightly different perceived benefits as well though, such as better lifestyle, goal setting, financial education and negotiating improved benefits and/or fees that were deemed valuable. Pretty much all subjective assesments of value, huh?
Advisers do all these things so there is little doubt that advice DOES create value at some level. There is a good story there, but how to quantify it?
In one study consulting actuaries attempted to quantify the value of the advice in present value terms but over the life of the estimated advice/benefits period. It indicated that advice given to a younger family during the wealth creation phase resulted in over $320,000 additional value during the course of their financial planning life. The cost of the advice attributed to this same family over the same period was about $40,000. There were a number of tested scenario’s – one with much more impressive numbers (over $600,000 added value), and some with less impressive numbers. All uniformly compared the cost of the advice component with the additional benefits received by the consumer from that advice though.
The conclusion was resounding in all scenarios. Advice added value above and beyond the costs of obtaining that advice.
There were additional intangible benefits that couldn’t be quantified in dollar terms that shouldn’t be ignored either. Some 66% of consumers cited “peace of mind” as a benefit; 63% felt they had “greater control of finances”; 62% felt they had “the prospect of a more comfortable retirement”. These are “value” too.
Undoubtedly the case can be made that good professional advice provides benefits that are well in excess of the cost. It is valuable therefore. The secret to valuing the advice component is in addressing two issues clearly – and as early as possible.
The first hurdle for advisers is to be able to explain why their structure and method of delivering advice is superior to other choices for the consumer, particularly the low/no cost choices. Then the benefits for the consumer have to be articulated, and preferably quantified wherever possible.
It would seem that experienced advisers would have the very real advantage of being able to draw upon their real life examples and provide case studies showing the work they have done for clients in the past, and showing the costs charged and the benefits obtained (testimonials in this respect are gold!).
Like the estate planning specialist in the earlier example, the cost of good advice compared to the benefits it can produce for consumers should leave no doubt that it is valuable however we have to accept responsibility for trying to ascertain what the value is for each consumer we deal with rather than allow it to become a subjective assessment based on inadequate understanding.