Chief Executive at FEIFA / FECIF Secretary General
The value of advice – and the cost of being unadvised
There have been numerous studies over the years that have shown the value of good quality financial advice – not least, the fact that clients that receive it are, in general, significantly better off in retirement and much more financially protected during their life journey towards that point.
I was therefore very interested to see a recent survey that highlighted the serious issues that can arise when unadvised clients use guidelines or “rules of thumb” that are no longer valid. The survey, conducted by AEGON, made the point that income levels that used to be acceptable, and which many non-professionals still believe in, are now highly dangerous to their financial futures.
For instance, the survey stated that one in five people using a “rule of thumb” yearly retirement income of 4% will run out of money in 30 years – in other words, before they die in some cases. In addition, many of those individuals want and expect to pass assets on to future generations – many will not do so, or will pass on far less, with this sort of “planning” in place.
The report highlights the importance of personalised and professional financial advice, particularly regarding income rates and projections.
The “‘4% rule”, developed by US adviser William Bengen in 1994, has often been turned to as a guide for determining a sustainable level of retirement income. However, Aegon’s research has found that in today’s economic climate, a 65 year old with a low risk portfolio, taking 4% of the initial amount each year, has a one in five chance of running out of money within 30 years.
The report goes on to stress that professional advisers are well aware of the restrictions of using and relying on such guidelines and “rules”. They are generally extremely good at monitoring the situation for clients, on a regular basis, to ensure that warning signs are heeded early on. When one considers that some consumers are actually still using a higher guideline, of 5% per annum, this further highlights the dangers of “DIY” financial planning and the relative and significant value of professional advice.
Obviously not all advice has always been good, but with sensible and workable regulations ensuring that advisers operate within an appropriate framework, the vast majority of such advice will be highly positive for consumers in the future, as it has been in the past.