The Value of Advice – Why it is Important to Seek Financial Advice

According to the International Longevity Centre those who work with Financial Advisers are on average $80,000 better off than those who don’t have advice.

The Centre uses data on thousands of people from the UK Office for National Statistics’ wealth and assets survey who were tracked over time. The research considers those who report they received advice in the period 2001-2007 and then looks at their data for 2012-2014 to see how their financial wealth and pensions wealth has performed.

The headline findings are dramatic. Overall, those who took advice in the earlier period are over $80,000 wealthier by 2012-14 than those who did not.

Interestingly, the proportionate uplift from taking advice is bigger for those of more modest means. While the “affluent but advised” group had an extra 17 per cent in financial assets compared with their affluent but unadvised counterparts, the “just getting by” group saw advice boost their financial assets by 39 per cent.-

How will you ensure that you are in a position to meet all these responsibilities? One way could be to simply transfer your savings into a bank term deposit every month. This could give you a return of 2% or 3% a year.

But if you are able to earn a greater rate of return, for example, 7% or 8% a year, the total amount that you accumulate could be much greater.

The following table illustrates how much more you can earn if you invest your money at a higher rate of return.

Amount invested every month for 25 years Total principal amount invested in 25 years Total amount at the end of 25 years
Return of 2% a year S$1,000 S$300,000 S$392,000
Return of 7% a year S$1,000 S$300,000 S$812,000

There is a striking difference between the sum that you can accumulate at 2% per year and the higher rate of 7%. Obviously, any investor would like to earn 7% instead of 2% per year. While it is definitely possible to earn a return of this magnitude over an extended period, an investor would probably ask the following questions before making the investment.

  • What are the risks involved? What can happen in a worst-case scenario?
  • How much time will it take to access my funds if I need them?
  • What are the returns that a similar investment has earned in the past?

It is not very easy to get answers to these questions. This is where a financial adviser can play a key role.

Understanding your financial goals and helping you meet them

Before offering you any advice, a good financial planner will first spend time understanding your financial data. This will involve getting a grip on how much you have saved so far and where this money is deployed. You will also need to provide details about your cash requirements – how much will you need and at what point in time.

Remember that a financial planner or a financial adviser is a consultant in many ways. Unless this person gains a deep knowledge about your finances and your goals, it is unlikely that you will be able to get any useful advice.

Every individual’s requirement and needs are different. Someone who pushes an investment product and tries to convince you to put your money into it at the very first meeting is probably a salesperson and not a financial adviser.

How exactly will a financial adviser help you? After analysing your data, you could be offered advice about what you need to do differently. Are you saving too little? Will the investments that you have made earn you an adequate level of return? Do you understand the risks involved? Do you have adequate life insurance and medical insurance?

After holding discussions with your investment adviser, you may realise that it is necessary to implement a number of changes in your investment portfolio. That’s the first value-add a systematic adviser can give you.

Harnessing the experts

As an untested investor competing with the market based on piecemeal advice and little experience; we’re too often susceptible to psychological pitfalls. An experienced adviser knows your portfolio and leverages the winning combination of experts to give you the best returns against your risk appetite. In summary, when you pay a good adviser, you’re alleviating your stress and letting your money work for you. The old adage after all is that time is money, so why not let someone whose job it is to make money handle yours for you?

Asset allocation

The manner in which your money is deployed will determine to a large extent the returns that you can expect to make. It will also have a great impact on the risks that you face. Getting the correct advice on asset allocation is crucial for your financial well-being.

Your financial goals may include buying a house, having an adequate sum of money available for your retirement, or paying for your child’s college education. Your financial adviser could tell you how you should invest your funds so that you can meet these objectives.

An investment adviser could also help you to understand your risk tolerance. Let us understand what this means.

It is common knowledge that an investment in stocks has the potential to give you high returns. But it also carries a greater degree of risk. When analysing an investment’s risk/return profile, many investors consider only the possibility of making greater returns, ignoring the fact that they could stand to lose a part of their principal if the market falls or if the company in which they have invested produces poor financial results.

Consider a situation where you buy shares of a market value of S$10,000 of a particular company that is a market leader and has excellent long-term prospects. Six months later, the share price falls and the value of your investment is down to S$6,000. Your reaction will indicate your ability to bear risk. You could:

  • Sell immediately to limit your loss.
  • Wait for the price to climb back to your original cost and then sell.
  • Do nothing. Wait for the market to correct itself.
  • Buy additional shares at the lower price.

Your investment adviser will use information of this type to help you to devise a strategy that fits your ability to bear risks, your investment goals, and investment horizon.

How should you select a financial adviser?

The Monetary Authority of Singapore issues licenses to those financial advisers who meet the required criteria. Ensure that the organisation and the individual that you are dealing with, is certified to offer you advisory services.

You should also understand how the adviser would be compensated for the services that are provided to you. Will you be charged a flat fee or a certain percentage of the amount that is invested for you? It is also possible that the adviser could receive commission from the institution whose products you invest in.

Doing what the investment adviser says

Should you follow all the advice that a financial planner provides? It is not really necessary to do so. In fact, you should make it a practice to do your own homework to ascertain whether the investment options being proposed to you meet your requirements. If you do this, it is quite possible that you could have questions about the proposed investment opportunity. It is the financial adviser’s duty to explain every aspect of the investment to you. In the event that you are not satisfied with the answers that you get or you don’t grasp the financial terms that are being used, you should hold back on your investment till all the queries that you have raised are answered to your satisfaction.

Disclaimer: The views expressed in this article are those of the author’s. Advice should be sought from a licensed financial adviser regarding the suitability of an investment product before making a commitment to purchase. Past performance is not necessarily indicative of future performance. Any prediction, projection, or forecast on the economy, securities markets or the economic trends of the markets is not necessarily indicative of future performance. Whilst we have taken all reasonable care to ensure that the information contained in this document is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness. The above report may contain data obtained from third parties and as such we cannot guarantee the accuracy of this data.