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Online advice a close second to financial planning

Glenn Freeman  |  26 Jul 2019Text size  Decrease  Increase  |  
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People have resorted to the internet for tips on how to invest their money – and with surprisingly good results.

It turns out that surfing the web for financial advice is almost as effective as using a financial planner.

People who use financial planners are more successful than those using brokers and bankers, according to a Morningstar study, but only marginally better off than those relying on the internet for advice.

It makes sense, especially when you consider the cost – or lack thereof – of an internet search, says study author David Blanchett, Morningstar’s head of retirement research.

"This is noteworthy given the low cost of internet information, relative to many financial advisers, and the growing use of the internet as the primary information source for households included in our analysis," says Blanchett.

There are numerous online resources at the fingertips of Australian consumers, including the very website you're reading right now, Morningstar.com.au.

The financial industry regulator ASIC provides a detailed web resource, Moneysmart, which includes a database of registered financial advisers and their qualifications, training, areas of specialty and any history of regulatory breaches.

Numerous professional bodies and organisations also provide general advice and information, including the Australian Securities Exchange, SMSF Association of Australia, Financial Planning Association of Australia and Association of Financial Advisers.

The Morningstar study mentioned earlier assessed data gathered over six years by the US Survey of Consumer Finances, noted how much people now resort to the internet for advice.

In 2001, only 3 per cent of households used the internet as their primary source of financial information – this number had ballooned to 40 per cent by 2016.

"However, the better outcomes associated with the internet declined from 2001 to 2016, so it is not clear to what extent this relation will persist," Blanchett says.

The study findings are also pertinent to Australia – especially in light of public inquiries such as the royal commission, which unearthed widespread misconduct and an erosion of trust in financial planners.

Negative perceptions of advisers are also reflected in Morningstar Australia audience surveys. Some 18 per cent of individuals surveyed shun financial advisers because they don't trust them, the Morningstar and Investment Trends 2018 Investment Product and Advice Needs Survey found.

A similar proportion of respondents stopped using advisers because of poor outcomes, and 20 per cent said they simply have no need for them.

However, about a quarter of those surveyed say they would use advisers for a second opinion, and a similar proportion would do so if it helped them access a wider range of investment types.

No surprise considering there is a correlation between financial planning and investment success.

Advice is worth paying for – as long as it’s good

That’s not to denigrate financial advisers, however. And there is evidence, of course, to suggest that the benefits of paying for good advice outweigh the costs.

According to research from Rice Warner, a local actuarial firm, the value delivered from acting on good advice can range from 1.8 to 6-times the cost of the advice.
Because financial markets and people’s circumstances are constantly changing, it is vital that your situation be reviewed regularly so changes can be made if necessary.

High quality financial advice is particularly important for Australians, given our ageing demographic and $3 trillion pool of superannuation savings.

"Access to affordable, quality financial advice can bring significant benefits to consumers. It can help them make informed decisions by providing guidance with investments, insurance and product recommendations," said Stuart Robert, member of parliament and former assistant treasurer, at the 2018 Australian Financial Advisers conference.

"As the population ages and client needs shift, the role of financial advice will play a more important role than ever."

Keep your adviser close – and your friends closer

Morningstar has also done work in trying to quantify the extra value a financial planner can add to household investment decision-making.

Blanchett examines how the quality of the following five household financial planning decisions varied across four different information sources.

  1. portfolio risk level
  2. savings habits
  3. life insurance coverage
  4. revolving credit card balances
  5. emergency savings.

The four information sources referred to are financial planners, transactional financial advisers, friends and the internet. The term "transactional financial adviser" spans stockbrokers, private bankers and other advisers who give more transaction- or product-centric advice.

"Households that were using a transactional adviser were making the worst decisions, and households using friends were the second worst," Blanchett says.

Advisers help make households make better decisions

He concedes there are potential biases in the study, but he says the findings "at least imply that working with a financial planner can help households make better financial decisions".

"We do not know why households working with a transactional adviser were making the worst decisions of the groups studied, although we can speculate.

"One possibility is that these households may have a false sense of confidence about their financial soundness because they get advice in a few domains and think that they are covered in all areas— when in fact they're not," Blanchett says.

Another of the potential skews in the study is what Blanchett refers to as "reverse causality" – where clients with more wealth are increasingly attractive to financial advisers.

In other words, advisers have fewer options to promote to individuals with less money to pay for them.

Households that relied on the internet for financial information made surprisingly good decisions, but this has diminished over time.

Households that relied on the internet as their primary information source scored almost 5 per cent above the average in 2001, but by 2016 this had fallen to 2 per cent below the average.

There are a variety of possible reasons for this, Blanchett says, noting that as more people are connected to the internet, the volume – and quality – of content has evolved.

“The benefits associated with the internet were due largely to early adopters, and as usage has increased, the calibre and intentions of internet users have declined.”

is senior editor for Morningstar Australia

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