Assessing the Value of Financial Advice: More than Dollars and Cents

Janus Henderson partnered with researchers from Kansas State University to conduct a study on the qualitative benefits of financial advice and found that there is a positive, significant relationship between the use of a financial professional and investment confidence. Retirement and wealth strategies expert Matt Sommer outlines the findings of the study and the key implications for financial professionals and their clients.

Numerous studies have been conducted regarding the benefits and costs – both perceived and actual – of professional financial advice. Most of the research, however, has focused primarily on portfolio performance and return generation. While arguably more difficult to quantify, another expected outcome of engaging a financial professional is increased investing confidence.

Performance aside, are investors who receive professional guidance more likely to feel confident making important financial decisions than those who go it alone?

To explore this question, as well as other qualitative aspects of the investor-financial professional dynamic, Janus Henderson partnered with researchers at Kansas State University to conduct a survey of 1,005 households in the U.S. The findings, which were published in the peer-reviewed Journal of Personal Finance last month, offer some valuable insights into how financial professionals can address the emotional and behavioral side of their client relationships.

Putting a Price on Confidence

Our survey results supported our hypothesis that a positive, significant relationship exists between the use of a financial professional and investment confidence. Specifically, respondents who worked with a financial professional were twice as likely to be confident in their ability to meet their investing goals than those who did not work with a financial professional.

While the study did not investigate why investors who work with a financial professional had more confidence, we believe goal setting – one of the steps in the financial planning process as outlined by the CFP Board of Standards – is likely a key contributor. Financial professionals who help clients establish and monitor progress toward their goals may be able to generate increased levels of client confidence. In turn, those higher levels of confidence may improve the likelihood that investors will implement a financial professional’s recommendations and stay the course during periods of market volatility.

The key takeaway for investors: When evaluating the decision to hire or continue using a financial professional, the potential positive impact on one’s confidence should be included within the cost-benefit analysis.

Couples Who Make Decisions Together Are More Confident

One of the control variables used in our survey that was also found to have a relationship to investment confidence was marital status and whether married/partnered couples make decisions together or separately. Respondents were divided into four groups: Single individual/sole decision maker; in a relationship and my partner is the primary decision maker; in a relationship and I am the primary decision maker; in a relationship and my partner and I make decisions equally.

Our findings showed that each of the first three groups had less confidence overall than the group of respondents who were in relationships where both partners made decisions equally. Specifically, compared to the joint decision-makers, respondents who said they were the primary decision maker in their relationship had 53% lower odds of being confident; respondents who said their partner was the primary decision maker had 70% lower odds of being confident; and single individuals who reported making decisions on their own had 66% lower odds of being confident.

These findings may have significant implications for how financial professionals approach their clients’ household decision-making styles. For example, they may want to be more proactive in providing non-decision-making spouses with opportunities to be involved in the couple’s financial affairs to encourage collaboration. At a minimum, couples should be informed that a potential advantage to joint investment decision-making may be an increase in each partner’s levels of investment confidence.

Entrepreneurs Have More Investment Confidence

Our survey found that self-employed respondents reported higher levels of investment confidence compared to the rest of the reference group. This is not surprising, since prior research examining the personality traits of entrepreneurs has shown that they have higher levels of self-confidence in general compared to non-entrepreneurs. And it makes sense that individuals who are responsible for managing the financial matters of their businesses would likely feel more comfortable managing their personal finances as well.

However, it’s worth noting that investing in the financial markets may require a different skill set and mindset than running a successful business. Furthermore, overconfidence is a common behavioral finance trap that can lead to poor decision-making. Financial professionals should take this into consideration when working with their self-employed clients by watching for signs that these individuals may be exhibiting overconfidence bias and helping them manage expectations regarding investment returns.

Major Life Events Produce High Anxiety

The study also tested a second hypothesis: An association between obtaining professional advice and low levels of financial anxiety. While no evidence was found to support this hypothesis, the researchers found a connection between incurring a major life event and experiencing financial anxiety. A life event was defined as any of the following: Starting a new job, losing a job, starting a new business, selling a business, and entering retirement. Respondents were also asked if they had been diagnosed with a major illness within the last 12 months.

Respondents who underwent a life event had 53% higher odds of reporting financial anxiety than those who did not. Again, this was not exactly a startling discovery – financial stress and major life events often go hand in hand. But the confirmation of a strong correlation on this front has important implications for financial professionals. Financial professionals who can establish dedicated processes for managing the financial aspects of specific life events will be in a better position to help clients reduce their anxiety – which is yet another benefit that can be factored into a client’s cost-benefit analysis when assessing their need for professional advice.

Ultimately, we feel this study’s main contribution to the industry is the reaffirmation that the benefit of using a financial professional involves much more than potential returns. In our view, a financial professional’s ability to boost clients’ confidence and help them manage anxiety stemming from major life events could indeed be considered “priceless.”

 

Janus Henderson is not affiliated with Kansas State University.