Is There Value in Advice?

The Investment Funds Institute of Canada completed its 2011 Value of Advice Report; and I thought you would be interested in some of the highlights.

So Wealth or Advice – Which Comes First?

The research samples that were studied have consistently shown that investors who work with financial advisor (advised investors) have more wealth and investable assets (larger portfolios) on average than those who do not (non-advised investors).  In the Canadian Financial Monitor database the sample of advised investors had an average net worth of $555,447 in 2011 compared to $191,743 for non-advised investors, nearly three times greater.  In the same study, investible assets of advised investor were found to be four times greater than investible assets of non-advised investors.   The large differences were found to exist for all age groups and income levels.

The Investment Plan – How it Pays Off

Great benefits arise from the discipline of developing and following a professional investment plan.  Investors with a plan save more regularly and tend to avoid the common investment biases and errors that they would fall prey to if left to invest on their own. 

According to results from HSBC’s The Future of Retirement: The Power of Planning 2011, those who have an advisor are more than twice as likely to have a financial plan.  Furthermore, those who have a financial plan in place and seek professional financial advice are the best off financially.  This group has the most retirement assets out of all the consumer groups.   In fact the group of individuals using an advisor for their financial planning had more than twice the retirement savings compared to those who did their own planning, and more than four times the savings compared to those who did not have a financial plan.

It is also clear that planning has positive impacts on the value of investor portfolios over time.  The 2011 Canadians and Financial Advice Study; data shows that the majority of advised investors believe that their advisor has had a positive impact on the value of their investments – 61% strongly agree that their advisor has helped them increase their net worth, and the same percentage 61% strongly agree that their advisor had done a good job in helping the achieve investment returns. 

Investing Without Advice – the Pitfalls

The results highlighted that many non-advised investors engaged in significant non-rational and biased investing behaviours.  In particular, the results show that individuals managing their own portfolios are overconfident when it comes to assessing their own ability to identify exceptional stocks.  They also note that a large proportion of about 30% have a preference for stocks that have the characteristics of a ‘lottery ticket’ and a very large proportion show a bias to familiarity – when judging between an unknown large listed company and a small listed company familiar to the investor 58% indicated that the small listed company would be of equal or lesser risk as an investment.

When considering the difference in the average returns between people who received help in choosing investment vs. those that didn’t receive help, on average the non-helped participants experienced returns nearly 3% lower returns than the people who received help choosing investments; even after paying a fee.

So the bottom line is, there is Value in Advice; of course if you are reading this you already know that.  Have a great weekend.

Tracey

I have only highlighted a few of the very interesting facts of the report; I encourage you to view the whole report at www.ific.ca .