What if only 17% of people ever went to the doctor?

That would be ridiculous wouldn't it - if only 17% of people went to the doctor when sick. Imagine, most people thinking that going to a doctor was unnecessary. It would be like thinking that a doctor couldn't  really know that much more about how to be healthy, or at least recover from sickness, than you do, so why pay all that money? 

Yet that is what people think about financial advice. It is one of the of the surprising conclusions of this paper from the United States on why people do not seek financial advice. Link

Perhaps you are about to dismiss that as the product of those foolish Americans, known for strange ideas - but the Commission for Financial Capability research shows similar levels of apathy for financial affairs here. Different survey aims and objectives, but very similar results from their survey at this link (especially refer to table three). 

There is no greater enemy to financial well-being than apathy. What we focus on, we can usually find a way to improve. The big debates within the sector tend to be about how to improve. That's valuable and so much earnest energy is expended there. I am part of it and I value the struggle and enjoy it. But I have to keep reminding myself, the really big debate, the one that would make all the difference, is how to get people paying some attention. 


What should advice cost?

What should advice cost? That was an excellent question from the audience during the first two of our recent getting in shape series. Perhaps this seemingly simple question surprised our panel. The answer to the question is not easy. It was a kind of sub-plot in the day's event: the question of the cost of advice is part of the disclosure story, part of the story about the future of advice, part of the story about the value of advisers solidly backed up by the research shared on the day. When asked what advice should cost the panel made a good beginning - in both Wellington and Auckland the first answer was "it should not be free". This echoed John Botica's  earlier comment during the first panel in Wellington where, talking about disclosure, he asked that any advisers taking commission should not refer to their advice as free. Of course advice isn't free. Often something that is not paid for is not valued. Advice is paid for (whether by fee or commission) and it is valuable. 

The question came up in the context of a discussion about how to make advice more accessible. For people to value advice they must first know it is available, believe it is worth getting - but these are just pre-conditions. Often we know something would be good for us, but don't do it.

Many people struggle with making the time to meet with an adviser - not just because of the time for the meeting, but they fear the time the work around the meeting will take. A good portion of the population are certain that their finances are a mess, and if not, then the musty file of papers definitely is a mess. So they fear judgment. Many people struggle with making room for the cost of advice. If they believe that it will require payment at the time and their budget is already stretched they will be reluctant to make an appointment. Commission has a valuable financing role to play here - but it is not the only mechanism, of course, that can make access to advice easier. 

So although advice should not be free, we need to make it easy to start the process. Which means the initial steps should be free - and easy to do.

Most advisers offer initial discussions at no charge. More can be done to make brief trials of the value of advice accessible. Social media helps, Zoom and MS Teams helps, but nothing quite beats a meeting - and the ability to slip into a 20 minute session on KiwiSaver at lunch or hear ten top tips on managing your home loan at the local mall are probably under-utilised strategies. Now add some tools in the client's first language (which will not be English in about a third of cases in Auckland) and spoken by someone who at least knows your culture a bit... these are access strategies. They reduce the psychological costs (fear of rejection, fear of shame, fear of being exposed as not having 'enough money to qualify for advice'). 


What is your advice business like?

Seth Godin, in one of his pieces describing the shift to online absolutely nails the definition of which businesses can most effectively compete with big tech, and which cannot: 

What if the work you do is:
compliance-based
standardized
repetitive
not based on innovative or flexible customer interaction…
If it is, it’s pretty likely that you’ll be replaced by a combination of robots, AI and outsourcing.
If they can find someone or something cheaper than you, they’re going to work overtime to do so.
The alternative is to be local, creative, energetic, optimistic, trusted, innovative and hard to replace.

If your compliance process makes your business compliance-based, standardised, and repetitive... then it is turning you into robot food. On the other hand, if it is helping you deliver that business described in the last line, you are future-proofing your business. 

 


What is wealthy in New Zealand?

All this talk about wealth taxes led Susan Edmunds, a regular writer in financial matters, to explore the subject. Her excellent article is at this link. 

The taxes proposed by the Greens would be as follows:

  • Under $1 million – Tax rate 0% 
  • Between $1-2 Million – Tax rate at 1%
  • Over $2 million – Tax rate at 2% on the value over $2 million

The Greens also propose that someone might be able to defer the taxes until death where virtually all the wealth is held in the property.

The question of whether a million dollars is wealthy requires some examination. One aspect of the question that keeps getting ignored is age and stage. Take these examples: 

  • My daughter is 20. It really doesn't matter that her net worth is negative and getting slightly worse right now: that's student debt. Trading money for a good education is a pretty good bet. The odds are that over her working life her degree will add to her income considerably. I asked her recently whether she would like access to the account we have with money in it for her uni education, she told me not to let her because she'd just spend it. Self-knowledge is a wonderful thing.
  • Consider a recently retired widow of 70 has just lost her husband. She owns a home in Auckland that is at about the median value - $850,000. Due to good saving habits and some life insurance she has a lump sum of $800,000 too. As a single person with wealth of $1.65 m she would be expected to pay the new wealth tax. This is how that works: term deposit rates are at 1.6% right now. Inflation is 2.5%. As her wealth falls between $1m and $2m, she would be taxed at at 1% on $650,000. The purchasing power of her capital (above the $1 million threshold) will now reduce by 1.9% a year - and she hasn't even spent a cent - add a withdrawal rate of about $40,000 per year to supplement her superannuation and wealth will decline quickly in the current low return environment (which looks like a sustained period). 

A big issue around wealth taxes (and capital gains taxes) is complexity, i.e. – identifying what is taxable and constantly having to value it. Then there is the question of having to find or release cash every year to pay for it (hence the reason most capital gains taxes are only payable on realisation).

In our business, views differ on what would be more efficient. Some prefer no additional taxes, some prefer a land tax to help address the current tax imbalance around property gains, while others prefer a capital gains tax. Still others say the focus should be on changes to reform tax to reduce carbon dioxide and other greenhouse gases. Both of the last two might help cool the housing market.

But I digress: people at different stages in life have different needs, if we don't take that into account, then we will miss the target of helping people that really need it. Of course there are people we should spend a lot more time and money helping. Regular readers of this blog will know my views on, say, helping those with mental health issues, preventing workplace accidents, and reducing suicide. We could do with better housing stock, preferably, by putting up a few more houses. 


Sorted sees the silver lining in huge increase of traffic

Sorted has had a big spike in traffic. Reported in Goodreturns, the focus in that article is on the demand for advice. That is true. The nature of the traffic also highlight the grim economic news: the most-used areas of the site were the mortgage calculator and the budget planner. But to return to the subject of advice, more than ever an holistic approach to financial advice is probably in demand now. We could do with a lot more capacity in this area - which currently is limited to AFAs. If you are an RFA, with relevant competence to offer financial planning, I suggest getting your transitional licence for the new regime and formalising your offer. It is needed.

Sorted: New Zealanders hungry for advice, Sorted says

In other news:

Fidelity Life: Fidelity Life makes board appointment

OBITUARY: Janet Brownlie

Suncorp: There is “no urgency” to return staff to offices - Suncorp

Pandemic risk mitigation and environmental policies go hand in hand


Lifetime wealth and insurance

So many New Zealander's feel that they may never have enough lifetime wealth (see this article by Rob Stock at stuff.co.nz). To focus on the positive: at least they are thinking about a good question. How much money is required to life out the rest of one's days is the number that underpins most strategic financial planning. It's the node which links planning for life and disability insurance to planning for retirement.

Most people in the financial services industry have several ideas about this number: a kind of rough rule of thumb, some assumptions about what should or should not be included, and then a much more detailed number they have worked out in their own case - and therefore a clear idea on how to do so. Most other people, unless they are working with a good financial adviser, haven't got that far. Just trying to work out the number generates the right kind of context to work on all sorts of financial planning questions, which is one of the reasons this question is such a good one to address.

For those of us with a strong interest in life and health insurance, it is interesting because that figure for lifetime wealth is essentially the amount of money required in order to never need to earn an income again. That's a circumstance broadly equivalent to total and permanent disablement. It is also a guide to the level of wealth at which insurance may no longer be required - although it may still be desired, in order to protect that wealth.

Of course, it is slightly more complicated in many risk planning situations. Costs can be higher in the case of disablement compared to retirement, but the time horizon may be shorter - as those with chronic health conditions affecting their ability to work have lower life expectancy. In the case of the death of a family member future financial requirements are affected by both the loss of income and the loss of expenditure by the deceased. Variations abound. When financial planners talk about their approach to calculating this number I like to hear the details of how they calculate the amount, and intrigued to hear if they consider age-adjusted life expectancy in the process. If you are interested in further discussion on this do let me know, I have a number of resources available to share.