Is now the time to join the crowd shifting to industry funds?
It depends on the value being sought.
Value means different things to different people.
Whether buying your morning coffee or another pigeon to your flock, we all value things differently.
In many ways, the story of value and the story of last year’s Banking Royal Commission were one and the same. It’s the story of perceptions, assumptions, greed, choices, and eventual disclosure: big companies taking liberties, small companies twisting perceptions, Australians getting ripped off, and regulators confused as to their role.
Value was the Banking Royal Commission’s ‘elephant in the room’. It wasn’t mentioned, which is interesting considering every purchase decision we make should be based upon value.
Shouldn’t it?
When we are making decisions about buying money (i.e. buying anything financial – loans, investments, superannuation funds, SMSFs, insurance, etc.) there are some perceptions that might mislead us when determining if our purchase is valuable.
Pricing is tricky
When it comes to perceptions of value, how a financial product or service is priced can be a value distraction.
If pricing and value were dance partners, our wiring usually views price as the leading partner.
This makes us susceptible to anchoring.
Anchoring trips the mental threads embedded deep within the bargain-seeking section of our brains to jump to conclusions that when we see an offer that was priced $x, now priced less than $x, our value blubs light up.
The industry superannuation funds have built their promise, and their web pages – compare the pair and lesser fees – using price anchoring. The industry funds are not alone using anchoring; they’ve done a great job of it.
Don’t get me wrong, cheap is good. Sometimes.
Value perceptions are even trickier when price is hidden.
Sally Patten of AFR Boss Magazine nailed it years ago when she wrote: “…if you don’t understand the percentage game, you won’t know how [institutions] are making a fortune out of your fortune”.
When we are buying advice about money, pricing in percentages is logical and common practice.
But it’s past its use-by-date.
When the price we pay for our money purchases is in percentages, our ability to compare and value the actual amounts paid is reduced as we might compare and value other costs such as electricity, rates, or our next holiday.
Pricing in percentages for financial advice is not fair as it creates an illusion of out-of-sight and out-of-mind real costs which the product providers have exploited since the dawn of retail financial advice.
Old arguments that most Australians can only afford to pay for their money purchases in percentages is a perfect example of putting price before value, a good example of an industry’s systemic inability to present advice as valuable, and originated in an industry built by product providers not interested in selling advice, just selling more products.
And that’s the point – when trying to assess the value of advice, it’s been a product-sellers game.
Or is it?
The Value Influences of Advice
The advice you buy can be another financial product like an SMSF, a superannuation fund, or a housing loan.
But there are several influences when the value of financial advice to assist your decision-making needs more in-depth consideration than just a financial product’s features and price:
- When you believe the ultimate stakes of a financial decision is high. That is, the consequences for making a wrong decision will have a significant effect on your life and the lives of those important to you.
- When there are strong emotions surrounding financial decisions. Often the greatest challenge to our financial lives isn’t the product we choose, but the emotions, habits, relationships and beliefs we have that influence our financial lives every day.
- When we find ourselves trying to make decisions where there is a myriad of choices. More choice is not better; it’s worse. As we navigate headlines, regulations, inquiries, marketing slogans, technological advances, urban myths, and best-selling authors, our best path forward can easily become littered with options and arguments causing frustration, inaction and unfortunately apathy.
- When we are making decisions, and we believe our circumstances are complex. Sometimes we feel the financial decisions we face are so different and unique from anyone else. Here we most value advice that not only provides us with confidence but also specifically understands, addresses and respects the complexities of our circumstances.
These are just a few instances when value must proceed price in any purchase decision of financial advice.
Of course, the opposite is true too.
If the stakes are not high, if there are no significant complexities, if the options are not confusing, and if emotions are not particularly strong, then price anchoring on price might be the most critical factor in the value of our advice decisions.
The bigger story of change occurring in the advice market on which all value should be determined is the fundamental shift from understanding the value of financial advice as “buying a product” to understanding the value of advice as “moving us from our current financial position to our next financial position”.
What do you reckon?
About Jim Stackpool
For nearly 30 years Jim has influenced, coached, and consulted to advisory firms across Australia. As founder of Certainty Advice Group, he leads a like-minded team of professional advisory firms seeking to create greater certainty for their clients. As an author, blogger, columnist, and keynote speaker, Jim is regularly called upon for his professional insights into the advice industry. His latest book Seeking Certainty is available now.