Updated 23 April 2020
Financial advice can leave non-affluent savers around £50,000 richer over 10 years, according to a report by the ILC. There is also new evidence that financial advice offers especially good value for the less well-off. Article by Nick Green.
Brits who took professional financial advice between 2001 and 2006 enjoyed an average increase in their assets of nearly £48,000 after 10 years, compared to those who took no advice. The benefits of advice were particularly significant for those with less disposable income, and also for people who took advice more than once. The combined benefits of advice over the 10-year period work out as approximately 2,400 per cent greater than the initial cost of the advice.
The study, produced by the International Longevity Centre (ILC) with the support of Royal London, compares people who took financial advice with those who didn’t, by assessing their assets (i.e. pensions, savings and investments) over a decade. The study also focused on people across two different wealth levels: ‘affluent’ (those who feel themselves to be comfortably off) and ‘just getting by’ (those whose income roughly balances with their expenditure).
Of the report’s many findings, perhaps the most interest is the revelation that the lower income group benefited from financial advice even more than the affluent people did.
The ILC report showed that it wasn’t just the wealthier individuals who benefited from financial advice over the decade. Rather, it transpired that those defined as ‘just getting by’ achieved a greater boost to their finances, despite starting from a lower baseline.
Following financial advice, the average saver in the ‘just getting by’ group had their pension pot boosted over the decade by 24 per cent (£35,054), compared to savers in the same wealth class who didn’t receive advice. In the ‘affluent’ group this difference was more modest, though still dramatic – affluent people who took advice had £24,266 more after 10 years than their non-advised counterparts, an 11 per cent boost.
The report also measured the effect on non-pension assets (e.g. savings and investments). Again, the benefits for those ‘just getting by’ were proportionally greater: a 35 per cent boost to non-pension wealth compared to non-advised people. The ‘affluent’ advised group enjoyed a 24 per cent boost to non-pension wealth, compared to those who didn’t take advice.
In total, the ‘just getting by’ group who took advice ended up an average £50,332 richer overall than those without advice. Meanwhile the ‘affluent’ advised group beat the non-advised group by some £43,353 overall.
This means that the average total benefit of financial advice over the 10 years was £47,706, with the bulk of this being pension pot growth.
Although the report confirmed a significant wealth boost from one-off advice, it also revealed the greater benefits of additional or ongoing advice. It compared those who had taken advice only once (at the start of the decade) with those who had also received advice two years before the decade’s end. Those who had taken the additional advice were found to be an average 61 per cent better off overall.
This figure must be treated with caution, as the report does not account for the initial wealth levels of these two groups – it could simply be that those with more assets were more inclined to seek ongoing advice. Nor does the study identify how much additional advice was taken over the decade. Nevertheless, these findings make it highly probable that there is a measurable boost from taking additional advice.
The majority of savers in the study took their financial advice from an independent financial adviser (IFA). If individuals in a similar position were to seek that kind of advice now, what would it cost them?
It’s possible to estimate the approximate cost of independent financial advice using the Unbiased Cost of Advice tool. Considering similar scenarios to the ILC report, we’ll assume that the average person in the ‘just getting by’ category has a pension pot of around £140,000 and perhaps some other savings, at the point of taking advice. Meanwhile the average ‘affluent’ person has a pension pot of roughly £230,000 and perhaps £50,000 or more in other liquid assets.
On this basis, savers could expect to pay between £1,700 and £2,500 for one-off independent advice on their overall financial position (as a rule of thumb, the more assets you have, the higher the fee will be). The adviser’s fee would include the selection of the best products for the saver’s circumstances and goals, as well as all the execution required.
Assuming an average one-off advice fee of £2,000 and an average benefit of £47,706 over 10 years (based on the ILC report), financial advice would deliver value nearly 24 times the initial cost – or £4,570 net per year.
The ILC study considers only a narrow time window – a single decade – and measures the value of financial advice over that period. In practice, the timescale of advice is much longer than this. Savers will be building up their pension pots over the course of entire careers, which could be 40 years or even longer. Towards the end of their careers, these savers will be looking to secure their income over their retirement, which could be another 20 to 30 years. Due to the nature of compound interest and investment growth, the benefits from advice should continue to snowball over time, resulting in an even bigger contrast with the finances of those who took no advice.
Furthermore, the ILC report only considers the ‘saving up’ stage of financial planning – not what advisers call the ‘decumulation’ stage in which people draw on their pension pots. It is particularly important to seek advice on how to take an income from your pension, since you are planning for the next two or three decades, and mistakes made at the start are not easily rectifiable (if at all). The point of retirement, and the decade immediately preceding it, are therefore the two most crucial times to seek financial advice.
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