A recent report found that providing holistic financial advice--covering savings, insurance, and debt--increases the value of financial advice by 2,472 basis points. This suggests that "big picture planning" is both valued and desired by clients.
In a white paper recently released by Shlomo Benartzi, PhD, an argument is made for the value of financial advice and, even more specifically, holistic financial advice. For holistic financial advice—advice that includes savings, debt management, and insurance decisions—the value is more than 2,472 bps (or approximately 7.5% of income) for the average household.
While, objectively, the value of financial advice is undeniable, the subjective value does not match this reality. This means that the perceived cost-benefit of financial advice is negative (i.e., individuals believe that the benefits are too low, and the costs are too high to justify seeking out financial advice). This is in stark contrast to repeated demonstrations that all individuals need help with financial decision-making.
So why do individuals fail to see the benefit of financial advice? Many individuals believe they can manage their financial situation on their own—however, 80% of people who declined financial advice and created their own portfolios preferred portfolios created by professionals when shown the outcomes of both (Benartzi & Thaler). People may also (falsely) believe that the benefits of financial advice are only reaped in the short run. In reality, individuals fail to maximize their investments in the absence of actionable recommendations—even when deciding over several decades, with several opportunities to learn and change allocations as a result. In other words, people need ongoing financial advice.
Benartzi argues that instead of focusing solely on investment advice, Financial Professionals (and potential clients) should approach advice more holistically by incorporating debt and insurance decisions as well. Not only does this increase the perceived (and actual) benefits, but it also reduces the costs. In fact, Benartzi finds that the value of holistic advice is worth 2,472 bps for the median household (keep in mind this value changes with account balance). Currently, for retirement, 40% of older workers are leaving money on the table by failing to maximize matching offered by their employer through their 401k plan (Choi et al., 2011); for debt, 20% of households fail to refinance their mortgage when lower rates are available (Keys et al., 2016) and most households fail to prioritize paying down their highest interest debt first (Gathergood et al., 2019); for insurance, 61% of employees choose a suboptimal health insurance plan (Bhargava et al., 2017). Taken together, the cost of not seeking holistic financial advice is $4,384 in annual income for the average individual (Benartzi, 2023). This brings an even clearer focus on the cost of not seeking financial advice.
So, how can FPs help clients realize the true value of ongoing, actionable financial advice? Benartzi states that it is imperative FPs incorporate new technologies and tools to create measurable and impactful benefits for their clients. These tools can include behavioral insights, personalized and individually tailored financial recommendations, and actionable BeFi findings. While FPs, regulators, and individuals focus on the costs of providing financial advice, they are ignoring and vastly underweighting the value access to financial guidance provides.
Using science-based AI technology, the Atlas Point® platform allows your organization to deliver personalization at scale, and helps Financial Professionals talk to more clients about the right thing at the right time.