Statistics released by the Financial Conduct Authority (FCA) showed that under 1 in 10 adults (9%) in the UK received regulated financial advice from August 2017 – August 2018. Whilst this might not seem like a large proportion, it was an increase from just 6% of adults the previous year. Whilst this represents a slight upward trajectory in the amount of people seeking advice, it still leaves a huge percentage of the UK population making financial decisions without an advisor. Research by FCA also shows that 50% of people did not seek financial advice as they had no use for a financial advisor and 3% said they did not know enough about financial advisors and what they can offer. This article will give three explanations to the question of what is the purpose of a financial advisor?
1. The Ability to Provide a Professional Service
Throughout life every individual will at some point require professional assistance. From consulting with a doctor on health issues, to hiring a builder for home improvements, the benefits of seeking someone specialised in a field are huge. Similar to these situations, individuals are likely to, at some point in life, require professional help in dealing with their finances and here displays one purpose of a financial advisor – to give professional advice and assistance.
The primary and most obvious purpose of a financial advisor is to provide advice to those who require assistance in managing their finances. Some may have stumbled across a large sum of cash from an inheritance or redundancy and wish for advice on how best to use this money to achieve their financial objectives. Whilst this may be the case for one client, another may wish to plan a comfortable retirement for themselves whilst deliberating further considerations such as inheritance tax planning. In either of these scenarios the purpose of a financial advisor is to consider the individual’s goals and find a solution to their problem. Although the advice given to individuals differs from case to case, the purpose of a financial advisor remains constant amongst all clients, in that they require a professional service in order to make well informed decisions about managing their financial future.
2. To Save People Time
Take the average person: In the 24 hours that are in a day, 8.5 of these are spent working, 1 is spent commuting (ONS average, 2018), 8 of these are sleeping (a generalisation). That leaves just over a quarter of the day left, before considering the time taken to cook, clean and exercise amongst further activities. Fundamentally, this gives very little free time for working adults to see friends and family and participate in their hobbies, meaning many individuals simply do not have enough time to conduct research into the right mutual funds which match their attitude to risk and objectives.
A common way for people to pick funds to invest in is by using quick, online advice which is not tailored to their individual situation. Whilst going online can be a great source of information for people with little understanding of investing to gain a working knowledge, recent events have demonstrated the need for advice tailored to each person. The LF Woodford Equity Income Fund was suspended from trading in early June 2019 whilst also being included in certain large self-investment platforms’ shortlist at the same time. Non-advised investors would have been shopping funds only on what they can see above the waterline, not the fundamentals in the engine room. This is why deeper research is required; to understand what the individual funds actually invest in and whether these are liquid or illiquid assets. In this case the money left, and self-directing investors are currently still not able to access their money. From this example we can see how the purpose of a financial advisor is simple – to allow people to savour time with family and friends, time that they won’t get back, and have an advisor make financial decisions which would require hours of research to arrive at. This is even before any retirement, tax, estate and insurance planning have been considered!
3. To Eradicate Emotional Decision Making
Humans are intrinsically wired to make emotional decisions, which often has a strong correlation with irrational decision making. During the elation of a portfolio delivering consistent higher-than-average positive returns, investors may feel invisible and be willing to take on more risk than they actually can. Likewise, if a portfolio is delivering negative returns for a prolonged period, investors may feel the need to jump ship and sell at a loss rather than weather the storm. In this scenario, the purpose of a financial advisor is to take the emotional side out of decision making for client’s investments decisions. The reasoning for this is that a seasoned, experienced advisor makes decisions based on rationality meaning they do not adhere to speculative investments and herd mentality but instead rely upon good common sense and analysis. Research published by the FCA showed that 37% of people felt able to decide what to do with their money on their own, however it is likely that a proportion of these people would fall into the traps created through speculation and sentiment.
The vast majority of people do not seek financial advice because they either:
(i) Do not believe that they have a use for a financial advisor
(ii) Believe they can make financial decisions by themselves
(iii) Do not know the purpose of a financial advisor and what they can offer
The purpose of a financial advisor is to provide a professional service to individuals of all ages and salaries which saves individuals worrying about mistakes, misinformation and making irrational decisions; not to mention allowing individuals to have more time to spend on the things they enjoy in life.
Sources and Statistics from
Office for National Statistics, ‘Average home to work travel time, age 16 years and over, UK, October to December 2018’, (July, 2019).
Ripley. E, et al., ‘The changing shape of the consumer market for advice: Interim consumer research to inform the Financial Advice Market Review (FAMR)’, Critical Research/Ignition House/FCA, (August, 2018).