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The Value of Advice

The idea of developing a model - let alone an actual measurement - of the amount of added value required in order to justify advice are, frankly, laughable. Nevertheless you can check out some of heat generated by this issue over at this link. It shows an obsession with 'return on investment' that is perhaps laudable in the normal course of the investment adviser's day job, but he or she should set it aside when looking at their value add.

Instead of creating a fictional world in which the adviser's value was measured solely by their ability to add to the ROI they should turn to the real world and consider the reasons consumers choose to work with them today, even in spite of the fact they may not achieve a higher return than the consumer investing directly.

It may be humbling for investment advisers to admit it, but consumers may feel the adviser isn't covering their fee with out-performance and still get value from them. There are at least four ways this can be true:

  1. The adviser helps them to overcome a desire to spend the money rather than invest - behavioural change is a big part of much advice-seeking, from membership of weight-watchers to hiring employment lawyers
  2. The adviser re-affirms their choice - they were going to invest anyway, but they needed re-assurance. Perhaps few among their circle of friends even have funds to invest. Perhaps the others recommend property...
  3. The adviser performs tasks which they find unpleasant - from simple mathematics to reading complex offer documents and giving an opinion on their contents
  4. The adviser is costly, but the cost is lower than the opportunity cost the client attaches to the time that they would have to invest to achieve the same aim

Sure, you could deliver better performance as well. Ideally you would. But don't forget to take these things into account. Tony Vidler spotted that financial advisers often forget what benefits they really offer clients - see this link.

There may be more reasons. If you don't think these are valuable consider similar alternatives in your life. A couple of years ago I had my driveway re-laid. I could have done the work myself. I could have achieved an equally good outcome, but I preferred to have my leisure and avoid what I would find unpleasant. Those are just as valid as the narrower definition of 'value' so often the focus of these arguments.

Quotemonster Statistics

Here are the latest weekly statistics from Quotemonster:

  • The average amount of life cover quoted in the last 7 days: $441,121
  • The average amount of trauma cover quoted in the last 7 days: $136,497
  • The highest Annualised premium quoted in the last 7 days: $42,635.30
  • The average amount of time the monster takes to quote in last 7 days: 9.68 seconds

Quotemonster Quotes are 99.96% accurate

Quotemonster goes through rigorous testing: Since May last year 969 quotes on insurer software were prepared and checked against Quotemonster quotes manually and the match is better than 99.96%.

Every comparison quote for testing has been retained and our test records are kept for quality assurance purposes. Every individual quote tested is at least 99.5% accurate – or else it is rejected and calculations are revised. All variances whether positive or negative are counted in the variance score. Quotes covered every insurer and benefit on the system. In addition users have performed more than 500,000 quotes since the service was launched and any reported issues are followed up. Please report any issues you find, we take our accuracy seriously.

Quotemonster Quotes are 99.96% accurate - is the summary - another way to look at that is the variance is typically 3.7 cents per hundred dollars. Although that suggests most quotes are cents out, whereas in fact more than 80% of quotes are either bang on or have a variance of 1 cent (+ or -), and then a few, mostly made up of waiver of premium calculations which appear particularly susceptible to error, have a greater variance.  

Overall I would like to say congratulations to James Punnett, Tran Zha, Kelly Pulham, and Fran who are always – it seems – working on the sometimes frustrating process of ensuring that there is a high degree of accuracy. You folks all do a great job!

Check out the best free quoting service online at www.quotemonster.co.nz

Open Bank Resolution and Deposit Insurance

The recent EU bailout negotiations are a good example of how not to bail out a bank. Three things seem obvious, with the enormous benefit of hindsight:

  • It should never have been allowed to get this bad
  • Having main banks closed is really bad for the economy
  • Deposit insurance only means something if the guarantor can meet the obligation

Focus on the deposit insurance: originally the European negotiators simply swept this aside, requiring a haircut. Although deposit insurance has now been reinstated, in return for a tougher haircut on uninsured deposits and some other conditions it is still far from ideal. Euros 100,000 is not that big a number. Think of a couple saving for a house. Think of a retired couple having just sold a house... and the rules are different for commercial accounts.

Imagine the chaos at present: no banks are open or have been for two working days. It is unsure what will occur when they re-open.

Far better to try to supervise for prevention rather than cure, and supervise through the process. Yes, it will be more complicated than simply saying 'everyone will get to keep their money' but life is like that. New Zealand may not have the money to fulfil that guarantee.

Hat tip: Rob Dowler.

Wasted Insurance?

Wasted insurance is cover for something that a client either does not want or need. In an effort to extend cover insurers have added to the range of cover in previously simple products. Income Protection now routinely includes a Critical Illness benefit and a Total and Permanent Disablement benefit - but should it?

Of course, a client with an income protection policy like that and without other cover would be grateful at claim time to have the additional cover.

On the other hand some clients may not be aware of the additional cover and purchase Critical Illness insurance and / or total Permanent Disablement cover as well. They may have been effectively paying for two benefits.

Of course, most clients are underinsured, not over insured, so this does not seem like a great risk. At least the consequences seem benign, but it is hardly a tidy job of risk management for a client.

Then again, they may think that they have a risk covered through the benefit attached to their Income Protection policy, but not realise that it is more restrictive (being a cheap kind of 'extra') than the cover that they would purchase if they bought the benefit separately.

Remembering to claim on such 'bonus' benefits may also be an issue for a client if they found themselves without a good adviser at claim time.

So there are a number of issues around 'bonus' insurance that could result in them becoming 'wasted' insurance. I would be glad to hear your views on it - drop me a line by email if you would like to share.

The Gems of Finance Writing in The Herald

I do sometimes give the New Zealand Herald a bit of stick which isn't always fair, two, at least, of The Herald's writers I admire, especially since they are proper journalists.

Diana Clement - with this great piece about churning insurance policies, a difficult subject given fair treatment here. Link. Diana kindly quoted me too.

David Chaplin - with his latest piece, this time pondering whether John Banks should be giving financial advice. Link.



How Well Are You Using Your Data?

As an industry we use, consume and create masses of data all the time. Yet... it is astonishing how little good data exists. Take the data used to support sales - and these are just two examples:

  • Advisers. For advisers good data on the actual probability of insured events occurring isn't just useful: it is actually a requirement to have this information if you are to meet the unit standards for presenting an insurance risk recommendation. Yet most companies have little up to date information about the likelihood of death, disability, or trauma conditions readily available to advisers.
  • Companies: Most companies have only rudimentary information about what advisers like best or least about their products. They struggle to get good information about what features are most used, or why. They rely mainly on anecdotal information about the products and features advisers prefer to quote. Most still run remote quoting applications rather than online systems.

But how well are we using our data? We are a data-driven business as well.

Yours is a data driven business too.

While I can easily see where data is good to have it is less easy to understand exactly how it will help make more money when it comes to deciding whether to hire another person to work exclusively with your data. We know this is a decision we are taking right now.

We're probably at an advantage to most advisers who are perhaps just beginning the journey of shifting their business to a platform where the data can be more easily analysis and processed to gain some insights. The areas we have already got good structured information are:

  • Time spent: where we spent our work hours. This came first - we bill by the hour, so we have more than 12 years of practice with this.
  • Customer contact: getting contact data up to a good standard for a number of different groups of clients so that it can be reliably used for activities like mailing, calling, and search.
  • Environment: creating and building new databases to hold data that we use to create insights
  • Processes: creating and sustaining processes to keep the flow of data into formal databases - ensuring that records meet the same standards day after day, week after week, year after year.

Yet, for all that work, we still feel we are at the beginning of the process - we do some pretty useful and interesting things with the data, but we can think of so many more we would like to do.

There are a number of unstructured data mines available to us which will soon become easier to access due to the work of clever data-analysis tools, which can look at, summarised, and even create a taxonomy of the unstructured information you hold: classifying and categorising the masses of data in your documents and presentations.