Financial planning suddenly seems to be full of holes. Or, perhaps more accurately, gaps – gaps in people’s financial literacy; and gaps in the adequacy of savings.
They’re not the same sorts of gaps, of course. One is a lack of understanding or knowledge; the other is an actual dollar shortfall. But they seem to share a common cause, and that cause is a lack of involvement with financial planners.
These gaps raise once again the question of why more Australians are not seeking out the services of planners. But a new piece of research might suggest there might be a different way of approaching that issue.
Earlier this week the Financial Planning Association and Zurich launched the Life Insurance Literacy Gap report, which assesses Australians’ level of knowledge of insurance and insurance products. Knowing how much Australians understand – or do not understand – about insurance is an important step in addressing the issues of underinsurance and mis-insurance.
The FPA/Zurich insurance literacy index – the first of its kind in the world – reveals opportunities for financial planners. It shows there’s a direct correlation between literacy and receiving advice from a financial planner and, reassuringly, the correlation is positive: the average literacy score for an unadvised individual is 4.5 out of 10 and the average for clients of financial planners is 6.7 out of 10 – a score the FPA and Zurich says is “approaching excellent”.
As the FPA and Zurich note, the report “proves that advisers are effectively educating customers about different types of insurance including superannuation-based life cover”.
Retirement savings gap
The second gap, this one in retirement savings, is Rice Warner’s assessment of the shortfall between how much money all Australians have in their superannuation funds today, in aggregate, and how much they’re going to need in order to fund an adequate standard of living after they retire.
The modelling is complex and detailed but the bottom line finding is: the gap is massive. And according to Dixon Advisory, the Rice Warner modelling is based on a range of assumptions that actually significantly underestimate the size of the gap. There are clearly opportunities here for financial planners to provide guidance and advice to Australians seeking to become financially self-sufficient in retirement.
The identification of these gaps isn’t news to people within the industry: Rice Warner has been calculating the retirement savings gap since 2003; and the level of underinsurance in the Australian community has been understood for years.
But we’ve been reminded of them at the same time another piece of research has come to light, published by the business school at Queensland University of Technology (QUT).
Professor Cameron Newton, Professor Stephen Corones, Dr Kim Irving and Drew Thomas have produced a paper, The Value of Planning Advice: Process and Outcome Effects on Consumer Well Being, which shows there is a link between getting one’s financial situation sorted out by using the services of a financial planner, one’s wellbeing across a range of other measurements. QUT and the Financial Services Council conducted a pilot study in 2010. The new report builds on that.
Feeling better now
Again, it’s a detailed piece of research and its findings are intricate and complex. But the bottom line – at the risk of journalistic over-simplification – is that if an individual receives financial advice (and presumably if that advice is effective, rather than leading to financial losses and consequent stress), they report feeling much better in a range of other areas.
“Consistent with the pilot study findings, clients viewed their financial situation as impacting a range of areas of their lives, including financial well-being, physical well-being, mental health/well-being, and family and social relationships and activities,” the report said.
“Clients using financial planning services for longer periods of time perceived themselves to be in a better financial situation and were more likely than those using services for shorter time periods to agree hat financial advice contributes to the various dimensions of their well-being.”
So, on two fronts we have gaps that are significant and growing. Whatever messaging the superannuation, life insurance and financial planning industries are using to address these gaps is not working, or at least not working quickly enough. People apparently aren’t responding to the traditional messaging that they have to do something about it.
But perhaps the messaging can be changed, even if only subtly, to reflect the benefits that the QUT study has identified. Perhaps, instead of berating individuals to put more into super, or buy more insurance, they could be persuaded by the improvements to their overall well-being that might arise by addressing both gaps.
It’s probably a basic marketing technique, to sell a product or a service according to the benefits they confer upon the purchaser. And who doesn’t want to feel better?
