Young & Invested: Do young people need a financial adviser?
Navigating money in your youth - fly solo or seek advice?
Welcome to my column, Young & Invested, where I discuss personal finance and investing for Gen Z and Millennials.
This column aims to be a resource for young investors navigating an ever changing financial, political and social landscape as they try to build wealth. Tune in every Thursday for the latest edition.
Edition 15
Have you ever made a terrible investment decision that put you off investing for a while? I have.
Admittedly there’s been several throughout my 6 years of being in the market and most of them could have been easily avoided.
Interestingly, Gen Z have been surveyed to project the highest level of investing confidence across all age groups. This doesn’t surprise me, given the younger half of our generation grew up with an iPad in their hand and have experienced a reasonably good market run during their time investing.
With easy access to an abundance of information (that AI now makes easier to understand), it can be difficult to see the value proposition of seeking paid financial advice. But does that mean we’re the best investors? Or that we will get better returns than previous generations? Highly unlikely.
As I discussed in a previous article, the changing industry landscape means that seeking formal financial advice has increasingly become a luxury for the wealthy, amidst a dwindling number of advisers. Higher barriers to entry and an online free flow of advice have left many scratching their heads wondering if a financial adviser is even worth it anymore.
What is a financial adviser?
In a world of finfluencers*, wellness coaches and other pseudo ‘professionals’, it can be hard to understand exactly what a financial adviser is and what role they play in your life.
Below are a few common types you may come across:
- Investment adviser: An individual who can provide tailored product advice (e.g. securities, managed investment schemes) to their clients. These interactions are typically ongoing.
- Financial adviser: An individual who works with clients to develop long-term financial plans and structures, offering ongoing guidance and adjustments.
- Money coach: An individual who typically looks at the behavioural and emotional aspects of advice, such as a client’s relationship with money. They may also provide education and knowledge building opportunities. Money coaches aren’t currently regulated in Australia like financial advisers are.
- Robo-adviser: Digital platforms that use AI, algorithms and advanced analytics to construct and manage a portfolio, typically at a lower cost to traditional advisers.
Importantly, anyone who gives personal financial advice and most general advice providers must operate under an Australian financial services (AFS) licence. Qualifications can be verified online on the Australian Government’s Moneysmart Financial Advisers Register, where you can view exactly which product areas that individual is licensed to advise on.
Are you a good investor?
Recent market volatility following Trump’s tariff announcements caused a sharp selloff that was one of the steepest and shortest in market history, proving that some investors are willing to liquidate at almost any price.
Source: Macrobond. Morningstar.
The following weeks saw the market rebound despite the doomsday predictions many were pedalling a few days prior. This article wasn’t written with the intention to speculate over where the market will go next, but it’s hard to argue that April was an apt display of sound investor behaviour.
The rise of passive ETFs has led many to believe that we can enjoy market returns with ease and without the need for formal guidance – but the human condition signals this is not always the case.
In fact, we can see the result of poor investor behaviour in the long term, with our annual Mind the Gap study. This concluded that investors earnt 1.1% lower returns for the average dollar invested in US funds vs the average fund’s total return over the same period. This return gap stems from mistimed purchases and sales which are likely driven by emotionally irrational decisions – much like we saw last month.
This is where financial advisers can add value. The advice industry can be somewhat inaccessible and arguably off-putting to many given the significant fee hurdle which can impinge on returns. However, it is important to remember there is a significant cost of making your own irrational decisions with no guidance.
Will you receive an inheritance?
It is entirely reasonable to dismiss the value of an adviser when you’re young with only a few spare dollars to invest. But what if your circumstances change?
For some this will occur as circumstances the largest projected intergenerational wealth transfer on the horizon with JB Were projecting a total of $5.4 trillion in assets will be transferred in Australia by 2050. The Productivity Commission expects that most of this will be from superannuation and residential property.
A Fidelity study found that almost 20% of ‘next gen’ investors (the aggregate of gen z and millennial cohorts) have already received some form of inheritance with close to half of the surveyed population believing they will receive an inheritance in the future.
Furthermore, half of those who have conviction about receiving an inheritance, believe that it will be $200,000 or more.
The survey also noted that emerging concerns about receiving an inheritance were surrounding tax implications, responsible management, family disputes and emotional stress.
Source: Fidelity International. Next Generation | Rewriting the rules of engagement report. 2024.
The transition from investing pay cheque to pay cheque, to suddenly inheriting a large pool of assets can be overwhelming and will often require legal and financial advice. Furthermore, a financial adviser may be better equipped to navigate the potential pitfalls of dealing with large lump-sum decisions.
Shani wrote an article here on what you should do if your inheritance will likely be a house.
Do people with financial advisers have better outcomes?
One study seems to think so.
It’s natural for young investors to assume that the largest value proposition of a financial advice lies in achieving superior returns. But the mechanism of how advisers may achieve this could surprise you.
Vanguard published a study where they attempted to quantify an ‘adviser’s alpha’ or the amount advice adds to investment returns. The table below shows the quantified value-add of best practices in wealth management across various regions.
Source: Vanguard. Putting a value on your value: Quantifying Vanguard Adviser’s Alpha. 2020.
As illustrated, the largest value-add to the average client came in the form of behavioural coaching, rather than other more traditional strategies. Picking investments is a surprisingly small component of total returns.
Behavioural coaching can be particularly beneficial when trying to wrangle a relentless news cycle that thrives on negative sentiment. With making trades now as easy as reaching into your pocket for your phone, investors often resort to poor behaviour that may not be conducive with their goals.
The key thing here is the mindset shift surrounding the value proposition – a financial adviser isn’t always there to beat the market, but to ensure that a client stays in the market for decades and comes up with the strategy to do that. In addition they may also advise on tax structures, mortgage management and retirement planning.
Can you do it yourself?
Access to technology has democratised a lot of the information that wasn’t previously accessible in the public sphere.
With an increase in beginner-friendly investment platforms, we now have the opportunity to access, digest and thus act on information we receive to the best of our ability.
Mobile trading platforms means I can buy and sell over the course of a conversation with friends at brunch. Given the abundance of resources, it is entirely possible to DIY an investment strategy and enjoy consistent growth to achieve your financial goals.
But one thing I’ve picked up in this job is the more you know the more apparent it is how little you know.
The limited time we have in our lives allow us to be a jack of all trades but master of only few. That’s why we need plumbers even though we know the tap is leaking. Sure you could YouTube a tutorial or put some tape over it, but at the end of the day you’re never entirely sure whether you’re doing as good a job as the plumber could do as a master of their trade.
Final thoughts
For those who are searching for a definitive answer, I apologise for being the bearer of bad news. I can’t provide one. Just like not all investors are the same, not all financial advice is the same. Services can vary from behavioural coaching to securities advice, to more complicated tax structuring or estate planning.
It’s no secret that there has been a good deal of criticism for the formal advice industry. The ultimate decision you make will be based on an evaluation of your personal circumstances, taking into considerations factors such as fees, goals, net worth and more. Such factors aren’t stagnant, and you may feel there are stages of your life that are better suited to DIY-ing it or seeking professional advice.
It is also important to acknowledge that many young people aren’t in the stage of life where they have sufficient disposable income or the privilege of a large pot of leftover cash to invest at the end of the month.
Like formal advice, I believe the online sphere also has its place and value. Evaluating what you see simply requires an extra grain of salt. The democratisation of financial insights has been a positive force in improving financial literacy and particularly helpful in increasing accessibility across all socioeconomic levels.
*The term ‘finfluencer’ loosely refers to a public personality who shares financial advice across social media platforms
Read previous Young & Invested columns
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Your inheritance will likely be a house. What should you do with it?
