Explaining the value of financial advice.docx

 The Value Of A Financial AdvisorFinancial advisors know they can offer great value to clients through:Improving their financial literacyDeveloping their saving and investment habitsBuilding and implementing a personalized financial planSelecting appropriate financial strategies and products for themImproving their investment decision makingbut until now it could be difficult to prove that advisors added value and did not just seek out clients with more assets. New independent research recently released by Professor Claude Montmarquette and Nathalie Viennot-Briot of the Montreal-based Centre for Interuniversity Research and Analysis on Organizations (CIRANO) offers the strongest evidence to date of the link between the presence of financial advice and the accumulation of financial wealth.The study, titled “Econometric Models on the Value of Advice of a Financial Advisor” accounted for the effects of more than 50 other variables so it could isolate the value of advice from other wealth-related factors. Almost 4,000 households completed detailed surveys and about half used a financial advisor. Their key findings are explained below.1. As indicated by many previous studies, people with a financial advisor accumulate greater financial assets. In this study, advised households had four times the assets of those without an advisor and had started working with an advisor when they had only $11K of assets. 2. The longer the household worked with an advisor, the greater the increase in financial assets. Chart 2 shows that the raw data indicates this and that after adjusting for dozens of other variables, advised households still build much greater financial assets.3. The value of advice could not be explained by greater investment returns. Chart 3 examines the possibility, as suggested by another study, that advised households earned a 3% better investment return (the curved line) but the actual increase in assets was far greater than that. After only 4-6 years of working with an advisor, the average household had 58% more assets than non-advised households. After 7-14 years they had assets 99% greater and after 15 years or more had 173% more. They did not break down the number of years with advice any further, but noted that it would take 35 years of 3% higher returns to reach the asset level of those working with an advisor. While part of the difference may be explained by advised households having a more productive asset allocation, there had to be other important value in working with an advisor.4. The most important benefit of working with an advisor appears to be a better savings behaviour. The study found that advised households save at roughly twice the rate of non-advised households, so the advisor plays a crucial role in motivating people to save and invest for their future. Summary: Financial advisors have always known they provide a valuable service. Clients have recognized the value of advice and have been willing to pay for it. The CIRANO study provides additional objective validation and measurement of what advisors and their clients have always known.The complete CIRANO study is available at: cirano.qc.ca/pdf/publication/2012RP-17.pdf. ................
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