A recent study seems to show that dealing with a financial services professional can lead to significant advantages.
Is it worthwhile to deal with an advisor* – or is it better to handle your own personal finances? That’s a good question, especially at a time when a growing number of services are offered online… Now a study by the Center for Interuniversity Research and Analysis of Organizations (CIRANO), the subject of an analysis report by the Investment Funds Institute of Canada (IFIC), sheds some interesting light on this dilemma. Take a look:
Too good to be true?
But… Aren’t there other factors, such as age, income level or household composition, that could explain this disparity? Is it really advice that makes the difference? Using a number of models to account for the effects of close to 50 socio-economic, demographic and attitudinal variables, the researchers were able to single out the effects of advice. The conclusion: yes, advice has a positive and significant impact on financial assets.
There are a number of reasons that might explain why advice has this effect.
- Savings discipline
The IFIC analysis pointed to saving as the behaviour that could best explain the good results of advised households. In effect, it found that advisors influence the savings discipline of clients, encouraging them to put money aside regularly and methodically, and helping them to adopt the means to develop this habit.
- 360° vision
Over time, the personal finance professional would come to have a detailed understanding of each client: financial situation, goals, investor profile, etc. Consequently, an effective advisor would be able to guide each client’s decision-making, both in everyday matters and at life’s turning points, while keeping an eye on the big picture.
- Objective distance
Many self-directed investors react impulsively to the ups and downs of the market, liquidating their shares when the value begins to drop instead of waiting for the best time or holding on until the turbulence has passed. The advisor would have the knowledge and the emotional objectivity necessary to help the client stay focused on the long term.
Finally, the advisor would contribute to the profitability of a client’s investments through his or her work on asset allocation and stock picking. The IFIC notes that, according to other research, a financial advisor may be able to obtain an annual yield advantage of up to 3% for clients, compared to investors who handle their own finances.
Of course, it’s important to keep in mind that the results cited here are average figures and that any given client’s experience may differ. With so many factors involved, it would probably be rash to associate a relationship with an advisor with a guarantee of results.
However, if the investor and the advisor have established a trusting relationship and a shared vision of goals, it seems that there might indeed be an “advisor effect”!
* In this publication, “advisor” refers to a financial security advisor in the context of personal insurance products and/or a mutual fund representative in the context of retail mutual funds.