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ILC-UK - The Value of Financial Advice

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Launched in the House of Lords on Thursday, 13th July 2017, this report, produced by ILC-UK with the support of Royal London, finds that those who received financial advice in the 2001-2007 period had accumulated significantly more liquid financial assets and pension wealth than their unadvised equivalent peers by 2012-14.

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ILC-UK - The Value of Financial Advice

  1. 1. The Value of Advice An ILC-UK and Royal London Roundtable discussion Thursday 13th July 2017 This event is kindly supported by Royal London #ValueOfAdvice
  2. 2. Welcome from ILC-UK Baroness Sally Greengross Chief Executive ILC-UK This event is kindly supported by Royal London #ValueOfAdvice
  3. 3. Welcome from Royal London Isobel Langton CEO Intermediary Royal London This event is kindly supported by Royal London #ValueOfAdvice
  4. 4. Presentation Ben Franklin Head of Economics of an Ageing Society ILC-UK This event is kindly supported by Royal London #ValueOfAdvice
  5. 5. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. Putting a value on financial advice Ben Franklin follow us on twitter: @ilcuk @bjafranklin
  6. 6. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. What am I going to cover?  The purpose of the project  Background: financial decisions, theory vs reality.  How do we measure the value of advice.  The impact of advice on behaviours and financial outcomes.  Is the advice market working for everyone?  Options for increasing take-up of advice.
  7. 7. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. The purpose of the project • Lack of robust evidence on the value of financial advice. • Little robust evidence on demand side factors that lead to increased/reduced take up of advice. • We seek to fill this evidence gap by:
  8. 8. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. The purpose of the project • Lack of robust evidence on the value of financial advice. • Little robust evidence on demand side factors that lead to increased/reduced take up of advice. • We seek to fill this evidence gap by: 1. Robustly estimating the added value of advice.
  9. 9. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. The purpose of the project • Lack of robust evidence on the value of financial advice. • Little robust evidence on demand side factors that lead to increased/reduced take up of advice. • We seek to fill this evidence gap by: 1. Robustly estimating the added value of advice. 2. Assuming there is a positive impact, to develop evidenced based recommendations to reduce barriers and increase demand.
  10. 10. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. What are financial decisions for? In theory: To maximise wellbeing over the lifetime • Life cycle theory – smoothing consumption • Saving and investing when young to support lifetime income. Consume wealth when old. • Prioritising larger gains tomorrow over smaller ones today.
  11. 11. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. But the reality is quite different We are prone to making errors due to a number of behavioural biases including: • We prefer rewards today over rewards tomorrow. • We weight losses about twice as much as gains. • We switch off in the face of complexity. • We are prone to procrastination.
  12. 12. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. But the reality is quite different We are prone to making errors due to a number of behavioural biases including: • We prefer rewards today over rewards tomorrow. • We weight losses about twice as much as gains. • We switch off in the face of complexity. • We are prone to procrastination. In theory financial advice should reduce our number of errors leading to better financial decision making and a higher level of lifetime income
  13. 13. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. Data: Wealth and Assets Survey – Waves 1 to 4 Method: 1. Test the impact of receiving financial advice in 2001-2007 on the following financial behaviours in 2012/14:  Saving for retirement.  Participating in the stock market.  Delaying/changing the date of retirement. 2. Test the impact of receiving financial advice in 2001-2007 on the following financial outcomes in 2012/14:  Value of liquid financial assets.  Value of pension assets.  Income in retirement. How do we measure the value of advice?
  14. 14. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. Defining financial advice “In the last five years, have you received any professional advice about planning your personal finances? By that I mean things life planning for retirement, tax planning, or investing money. But please do not include any advice related to running a business or mortgages” Wealth and Assets Survey
  15. 15. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. The geeky bit! How do we deal with self-selection? Big problem – people who take advice may be more prone to better financial decision making anyway. What can we do to counteract this bias?  Identify the characteristics that make people more likely to take advice (i.e. wealth, sociodemographic characteristics, behaviours, risk tolerance etc.).  Amongst those who are more likely, identify the impact of advice on the behaviours and financial assets of those who took advice vs those similar individuals who didn’t.
  16. 16. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. The geeky bit! How do we deal with self-selection? Big problem – people who take advice may be more prone to better financial decision making anyway. What can we do to counteract this bias? 1. Identify the characteristics that make people more likely to take advice (i.e. wealth, sociodemographic characteristics, behaviours, risk tolerance etc). 2. Amongst those who are more likely, identify the impact of advice on the behaviours and financial assets of those who took advice vs those similar individuals who didn’t. We use a technique called propensity score matching
  17. 17. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. Impact of advice on behaviours • 8.6 percentage points more likely to be saving in 2012/14. • Rises to 9.7 percentage points amongst less wealthy subset. • 10.4 percentage points more likely to have risky assets in 2012/14. • Rises to 10.8 percentage points amongst less wealthy subset. …so those receiving advice are saving more and investing more
  18. 18. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. Impact of advice on financial outcomes • £13,435 more in liquid financial assets by 2012/14 • Rising to £14,036 amongst less wealthy subset (39% more wealth than equivalent non advised) • £27,664 more in pension wealth by 2012/14 • Rising to £30,882 amongst the most wealthy subset (16% more than equivalent non-advised) • £25,859 more amongst less wealthy subset (21% more than equivalent non-advised). • £773 more pension income in 2012/14. • Rising to £880 amongst the most wealthy subset (16% more than the equivalent non-advised) • £713 more amongst less wealthy subset (19% more than non-advised Effect on financial outcomes is large – particularly amongst less wealthy subset in proportionate terms
  19. 19. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. The value of advice in numbers Source: ILC-UK calculations using Wealth and Assets Survey 2006-8 and 2012-14
  20. 20. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. But the market is not working for everyone Advice uptake remains low • Only 16.8% of people saw an adviser in the years 2012- 2014. • Even amongst those who took out an investment product, less than half received advice. • Only 18% of those who took out a personal pension saw an adviser Numbers of IFAs growing but remain below 2011 levels Source: APFA
  21. 21. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. If advice works the key issue is getting people through the front door…. • Using advice to support the auto-enrolled • Default guidance for those seeking to access their pension savings • Helping to create informed consumers through the pensions dashboard • Harnessing technology to promote advice services • Regulation should continue to place higher emphasis on accessibility Potential options
  22. 22. The International Longevity Centre-UK is an independent, non-partisan think-tank dedicated to addressing issues of longevity, ageing and population change. Many thanks Ben Franklin International Longevity Centre - UK 02073400440 Twitter: @ilcuk @bjafranklin
  23. 23. Response to findings Sir Steve Webb Director of Policy Royal London This event is kindly supported by Royal London #ValueOfAdvice
  24. 24. Discussion This event is kindly supported by Royal London #ValueOfAdvice
  25. 25. Final Reflections Ben Franklin Head of Economics of an Ageing Society ILC-UK This event is kindly supported by Royal London #ValueOfAdvice
  26. 26. Close Baroness Sally Greengross Chief Executive ILC-UK This event is kindly supported by Royal London #ValueOfAdvice
  27. 27. Future of Ageing Conference 2017 Wednesday 29th November 2017 London Early Bird tickets available Visit www.ilcuk.org.uk for more details.

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