Study shows financial advice instills savings discipline

By Susan Yellin | December 12 2016 07:00AM

Photo: Freepik

Volatility and diversification are important considerations when constructing a client’s financial plan, but it’s the discipline brought on by long-standing financial advice – the so-called “advisor effect” – that is at the heart of why clients save more with a financial advisor than those without one, according to a new study.

“Advice matters,” summed up Claude Montmarquette, who co-authored The Gamma Factor and the Value of Financial Advice with Nathalie Viennot-Briot of the Montreal-based Centre for Interuniversity Research and Analysis of Organizations (CIRANO).

The 2016 report, presented during a seminar held by The Investment Funds Institute of Canada (IFIC) in November, was based on a survey conducted by Ipsos Reid for Power Financial Corporation and included data from fiscal 2013. It follows an earlier study released in 2012.

Both reports stated that key factors that affect the probability of having an advisor deal with income, savings capacity, age, educational level and financial literacy. But it’s the “gamma” factors of discipline and increased savings rate that are crucial features associated with valuable financial advice.

Significant impact

The 2012 report noted that advice has a positive and significant impact on financial assets and is an important contributor to levels.

The earlier study also noted that those who stuck with an advisor for 15 years or more had 2.73 times more financial assets than those without. This compares with the second study, which shows that number climbing to 3.9 times more financial assets than those without financial advice. IFIC notes the differences stem partly as a refinement to the CIRANO researchers’ analytical technique and better financial markets when the second study was conducted.

Dropping an advisor between the times of the two studies, the so-called survival principle, was costly to clients, many who lost a significant percentage (34.2 per cent) of their asset value, while the households that held on to their advisor gained 26 per cent in asset value. “Don’t leave the market too fast,” Montmarquette suggested.

Having an advisor, said the latest study, increases the probability of reporting a positive savings rate and explains the difference in household asset values over those without an advisor.

“In short, financial advice matters and the results are robust,” said the report.

How much will they pay?

Montmarquette said he was not finished with assessing the value of financial advice, particularly the role of financial literacy. He also wants to delve into whether low-balance or low-income investors benefit from having advice and whether asset mix has an impact on performance. The latest survey also states that CIRANO researchers would like to look into how much investors are willing to pay for advice.

Last September, IFIC released statistics on a survey by Pollara showing that mutual fund investors value the advice they receive from their financial advisors, with 95 per cent saying they can trust their advisor to provide them with sound advice and 88 per cent indicating that the advice they get leads to better returns. On top of that, a strong 91 per cent said they receive value for the money they pay their advisor.

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