Collaborative advice drives success

That's the essence of the findings of a recent report, “Financial Advisors and Boomers,” that I recently completed with Elvin Turner of Turner Consulting LLC for the Retirement Income Industry Association.

We sought to explain this differential in preparedness, and found four equally important reasons:

• There is a connection between frequency of advice and financial preparedness.

• Advice is most effective if provided in a collaborative relationship.

• Households must be committed to participating in this collaboration by learning as much as they can about their finances and updating themselves on new developments in topic areas.

• Advisers must enable households to invest and stay invested. They do that by first by helping households to develop a strategy, then by mitigating their downside risks and through wise long-term investment.

As in any relationship, it takes two active parties to collaborate effectively. Advisers who collaborate with affluent households — we studied households with at least $100,000 in inflation-adjusted investible assets in 1994 and 2004 — enable those households to thrive financially. In fact, regular advice appears to be a critical factor to providing a significant benefit when comparing net worth, total assets or financial assets over a 10-year period; the same pattern exists for the periods 1996-2006 and 1998-2008.

The research suggests that collaborative advisers provide the most benefit to households by helping them construct a comprehensive financial strategy. But most important, they assist in assembling the network of legal, financial investment and risk management advisers and programs that support a household's financial affairs, helping it to invest wisely and protecting it from unforeseen, but inevitable, misfortunes.

The cross-silo approach is careful, deliberate and wide ranging. While some of these services are not as dramatic or immediate as picking the right stocks, they likely account for the superior financial performance of millions of well-advised households.

As we look for factors to explain the superior financial preparedness of households that obtain financial advice “always” or “sometimes” before major financial decisions, the use or non-use of various sources of information is another factor to include. More than 80% of such households reach out to various sources in order to receive information. Less than 50% of the never-advised households use any in-formation sources.

There are some key differences between households that always use advisers and those who sometimes use them. Indeed, more always-advised households use a limited number of impersonal information sources (such as financial newsletters and brochures) and personal sources (financial institution personnel, and friends and relatives). The sometimes-advised households use more information sources.

Always-advised households are more likely to use financial newsletters, brochures, institution personnel, and friends and relatives as sources.

Households use different types of financial advisers based on how often they seek advice. Generally, the always-advised households tend to pick one of many kinds of professional financial advisers more than the sometimes-advised households.

Over the past two years, the always and sometimes households report using full-service brokers, certified financial planners, bank/ savings-and-loan advisers, lawyers, captive agents, credit union advisers and private bankers to a comparable degree. But the always households are more likely to use independent financial planners (29%) and certified public accountants (25%), while the sometimes households are more likely to us mutual fund advisers (17%), independent insurance agents (10%) and discount brokers (6%).

Financial advice differs with the client's wealth. Mass-market always-advised households are much more likely than their peers to have received investment advice recently. Always-advised affluent households want overall advice and estate planning in addition to investment advice. Wealthy always-advised households get every type of advice more often than their somewhat-advised peers.

Interestingly, the opposite occurs as households age.

For advisers, the key insights of the findings are that successful clients are those with whom the adviser works hard to inform, protect and equip.

Larry Cohen is vice president for consumer financial decisions at SRI Consulting Business Intelligence.

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