There have been numerous studies over the years that have shown the value of good quality financial advice – including the perhaps unsurprising finding that those who receive such advice are, in general, significantly better off in retirement than those who don’t, in addition to being better protected financially during their life journey towards that point.
I was therefore interested to see a recent survey that highlighted the serious issues that can arise when unadvised clients use investment guidelines or “rules of thumb” that are no longer valid, when managing their own investments.
The survey, conducted by Aegon, makes the point that income levels that used to be acceptable, and which many non-professionals still believe in, are now highly dangerous to the financial futures of those who employ them.
For instance, the survey stated that one in five people using a “rule of thumb” yearly retirement income of 4% will run out of money in 30 years – in other words, before they die in some cases.
In addition, many of those individuals want and expect to pass assets on to future generations – even though in actual fact, owing to have this sort of “planning” in place, many will not be able to do so, or will be able to pass on far less than they expect to be able to.
The report also highlights the importance of personalised and professional financial advice, particularly regarding income rates and projections.
The “‘4% rule”, developed in 1994 by a US adviser named William Bengen, has often been turned to as a guide for determining a sustainable level of retirement income. However, Aegon’s research has found that in today’s economic climate, a 65-year-old with a low risk portfolio who takes 4% of their initial pension pot each year has a one-in-five chance of running out of money within 30 years.
The report goes on to stress that professional advisers – unlike un-advised individuals who aren’t trained in financial matters – are well aware of the problems of using and relying on such dated guidelines and “rules”.
Such advisers, the report notes, are also generally quite good at monitoring the situation for clients, on a regular basis, to ensure that warning signs are heeded early on.
When one considers that some consumers are actually still using a higher guideline amount for their anticpated post-retirement income, of 5% per annum, this further highlights the dangers of “DIY” financial planning, and the relative and significant value of professional advice.
Obviously, not all the advice professional advisers have given out has always been of the highest possible standard. But with sensible and workable regulations in place, to ensure that advisers operate within an appropriate framework, the vast majority of advice will be highly positive for consumers in the future, as it has been in the past.
To read more about the Aegon survey on Aegon UK’s website, click here. Aegon is a multi-national insurer and financial services group based in the Netherlands.