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Key Findings

The Cost of Credit Repair

How much does credit repair really cost? We’ve got the answer!

To ensure we only surveyed credit repair clients, we added knockout questions to our survey that eliminated consumers who had used free or paid services such as:

• Free or paid credit score services – (Credit Karma, Credit Sesame, MyFico)
• Bank, Credit Union, or credit card scores
• Credit Bureau scoring or credit report services 

The True Cost of Credit Repair

We did not visit any credit repair companies’ websites to bring you the true cost of credit repair.  These are the results from our actual surveyed consumers who paid for credit repair.

Here are the numbers:

• 17% of respondents said their lifetime total was less than $250
• 31% of respondents said the lifetime total of all monthly fees, start-up costs, and additional fees was between $250 to $500
• 19% paid between $501 to $750
• 16% of respondents said the lifetime total  was between $751 to $1,000
• 16% spent over $1,000 for all services received

Of course, the amount spent correlated with how long the respondents stuck with their repair company.  See this chart:

Here are the top answers to how long our respondents used their credit repair company:

• 3 to 5 months – 31%
• 6 to 9 months – 23%
• 1 to 2 months – 22%
• 10 months or more – 18%

As shown in the chart above, we found a strong correlation between the duration a consumer worked with the credit repair company and the amount of money they spent.  Here are some statistics on that:

• 38% of respondents who worked with a credit repair company for at least 6 months spent over $750 compared to 28% who spent over $750 and worked with the company for just 5 months or less
• 32% of all respondents spent over $750 on credit repair services.  Of these big spenders, 48% reported a credit score gain of 100 points or more

Credit Score Gains from Credit Repair 

We also wanted to find out if credit repair companies really work.  To find this out, we asked our survey subjects:

• What their credit score was prior to working with their company?
• What was the overall impact on their score?
• What is their current credit score?

Overall, we found strong evidence to support the claim that credit repair companies have a positive impact on their clients’ credit scores, particularly when spending more time with a client.

• The most common credit score gain reported was 100 to 149 points (26.3% of respondents)
• The highest percentage of respondents (44.6%) started receiving credit repair service with a 300 to 579 score, while 33.4% started with a 580 to 669 score
• 15.4% of all respondents received more than 150 point credit score increase
• Respondents who started off with a 300 to 579 (the lowest range of scores) received the highest increase in scores, with 49.3% getting a 100+ point increase
• Respondents who received Bankruptcy recovery services raised their scores higher than the recipients of any other services, with 53.5% reporting a 100+ point gain

We also found a correlation between the length of time a consumer stayed with their repair company and higher increases in credit scores.

• 48% of respondents who used credit repair services for 6 months or more got an increase of 100 points or more to their credit score.
• This dropped to 33% if the respondents only used credit repair services for 1 to 2 months .

Marketing Analysis: How Consumers Find Credit Repair Companies

We also asked how the respondents first found their credit repair company.  Here were the answers from highest to lowest percentage:

• Online search – 45.4%
• Referral – 37.2%
• Advertisement – 13.4%
• Phone Solicitation – 2.8%
• Other – 1.0%

We dove deeper into the top two sources of clients for credit repair companies (online search and referral), and discovered the following:

• Online search clients spent more, on average, than Referral clients.  55.5% spent over $500 while only 48.9% of clients who came by referral spent over $500.
• Clients who came from *Advertisements or Phone Solicitation spent the least on credit repair – 46.4% spent over $500.
• Online searchers and Referral clients experienced similar credit score gains.  Online search clients experienced a credit score increase of 100 to 150 points (27.8%) compared to 26.3% of Referral clients.
• Referral clients experienced fewer billing problems.  61.3% reported no billing issues, while 51.1% of Online Search clients reported no billing issues.
• Clients who came via Advertisement and Phone Solicitation were by far the least happy.  54.9% reported their overall experience was “Good” or “Excellent” compared to a combined 69.8% of Referral and Online search clients who reported a good or excellent experience.

*We’ve combined respondents who found their company via Advertisement or Phone Solicitation in our results above for greater statistical significance.  We only had 14 respondents (2.8%) who became a client through phone solicitation.

Services Received – The Stats

Perhaps you’re wondering what credit repair companies actually do for their clients.  

Credit repair companies are mostly known for helping their clients remove inaccurate or damaging items from their client’s credit reports.  

However, many of them claim to offer a host of other services from credit counseling to identity theft recovery.

We asked our respondents what their credit repair company actually did for them, and here were their answers.

Top services received:

• Removed negative items (late payments, collections, charge offs) – 56.2%.
• Credit consulting – 49%.
• Set up payment plan with creditors – 48%.
• Debt consolidation – 46.6%.
• Sent dispute letters to the credit bureaus – 39.8%.
• Sent “Goodwill letters” to creditors – 28.6%.
• Sent cease and desist letters to creditors – 24.8%.
• Identity theft recovery – 21%.

Of these services, the respondents who had “goodwill letters“ sent to their creditors on their behalf reported the best overall experience (76% reported an overall “good” or “excellent” experience).  This group also contained the highest percentage (54.5%) of people whose credit scores improved by 100 points or more.

We also asked which items the credit repair companies were able to successfully remove from their credit report.

Here were the top 8 answers starting with the most prevalent:

• Collections – 55.2%
• Late payment – 53.6% 
• Medical bills – 43.8%
• Charge offs – 30.6%
• Inquiries – 25.8%
• Judgments – 20.8%
• Student loans – 17.8%
• Bankruptcy – 11.2%

Respondents who received Bankruptcy recovery services raised their scores higher than the recipients of any other services, with 53.5% reporting a 100+ point gain.

Customer Experiences with Credit Repair Companies

Sometimes the financial industry takes shots at and casts a negative light on credit repair companies. We wanted to know how actual credit repair clients felt about the service they received.

We asked their opinion on:

• their overall experience;
• the company’s business practices (marketing, customer service, billing, etc);
• if they were charged for anything they felt was inaccurate.

Here’s what we found:

• 67% said their overall experience was “Good” or “Excellent”;
• 26.4% reported an “Okay/Neutral” experience;
• 6.6% reported a “Bad” experience;
• 87% of respondents thought their repair company’s business practices were “Professional” or “Fair”.

We also found that clients’ overall opinion of the credit repair company was much more favorable if they received a nice credit score increase.  See the chart below.

We were not happy to see that among credit repair clients, a sizable portion feel their company was shady, borderline illegal, and experienced billing problems.

• 12% of respondents thought the repair company’s business practices were “Shady” or “Borderline illegal”.
• 25.8% thought the credit repair company kept them as a client. longer than it should have taken – They felt “strung along”.
• 18.6% said the credit repair company made it difficult to cancel.
• 55.2% of all respondents said the billing was as agreed.

Conclusions

We were not happy to see some of the damning results from this study.  Many of our respondents reported billing inaccuracies, a problem that must be corrected. Imagine if only 55% of Netflix subscribers reported correct billing.  That would not be very good.  Yet, that’s the unfortunate statistic we have for credit repair companies. 

Having said that, the study provides overwhelming evidence that professional credit repair companies do make a positive impact on the credit scores of their clients.  There is also a significant correlation between the amount of time a client sticks with their repair company and bigger credit score gains.  

If consumers do seek credit repair services, we recommend that they proceed with caution, research the best companies online, and ask around for referrals.  If they move forward, they should plan to stick with the company for several months for the best results.

The post 20+ Credit Repair Statistics & Facts (Survey) appeared first on FinMasters.

Chart: United States Annual Inflation Rates (2012 – 2022)

We’ve all seen articles advising people on how to cope with inflation, but what are American consumers actually feeling, and what are they actually doing to keep up?

We wanted to know, so we asked.

Survey: The Impact of Rising Prices on Financial Choices and Behaviors

We asked a nationally distributed group of Americans a series of questions designed to assess their perceptions of inflation and what they are doing in response to price increases.

Q: How Worried Are You About Rising Prices?

A huge majority of respondents, 95.67% of them, were either “somewhat worried” or “very worried” about rising prices, with an absolute majority in the “very worried” category.

These proportions held up very consistently across gender, age, and income lines

As you might expect, the highest percentage of “very worried” responses came from the lowest income bracket and the lowest percentage came from the highest income bracket. What’s unexpected is that even in the highest income bracket only 3.85% say they aren’t worried at all.

Takeaway: Low-income Americans are most concerned about rising prices, but concern is present through all income brackets, even the highest ones surveyed.

Q: Have the Rising Prices of Gas and Other Consumer Goods Made You Rethink You Financial Choices or Changed How You Spend Money?

Over 50% indicated that inflation has forced them to reconsider the way they manage their finances, and under 10% replied that they had not found any change to be necessary.

When we look at a detailed breakdown, we see that people from age 30 to age 60 had the highest rate of positive responses, suggesting that people in age brackets likely to have families are feeling substantial stress.

In the income breakdown, we see that – as expected – people with higher incomes are least likely to have had to reassess financial choices, with one anomaly in the $125,000 to $149,000 bracket. 

It may seem initially surprising that fewer people in the $10,000 to $24,000 bracket saw the need to change than in the next higher income bracket, but that may be because people with incomes that low were already doing everything in their power to reduce spending.

Q: The Rise of Prices in What Category Has Had the Most Significant Impact on Your Day-to-Day Life?

Here the leading roles played by gas, food, utilities, and housing are entirely expected, as these are expenses that most people can’t cut out and they are also areas in which price increases have been most pronounced.

Q: Which Of the Following Financial Choices, If Any, Have You Made Because of Rising Prices?

Here, again, we see expected results. Looking for ways to cut costs is a generic statement that includes most of the subsequent options, so it naturally has the highest positive response rate. Delaying buying a car makes sense, given the extraordinary increase in the prices of both new and used cars, and delaying a home purchase is a natural decision with both interest rates and prices rising.

Delaying debt payments and borrowing money are also common, but they are risky options that indicate that substantial numbers of people could find themselves in more trouble in the near future.

The detailed breakdown is, naturally, more revealing, if not always easy to explain. All ages, genders, and income levels saw from 68% to 82% looking for ways to cut costs and save.

Higher-income people were most likely to have delayed buying a car (though it was common at all income levels), presumably because they are more likely to already own serviceable vehicles. People between 18 and 44 were, not surprisingly, more likely to have postponed a wedding.

Some figures are less easy to explain – the $125,000 to $149,000 income group seemed to run up a high rate of responses in an unusual number of categories – and would require more research to explain or dismiss as statistical anomalies.

Q: Which of the Following, If Any, Have You Done to Save Money as Prices Rise?

Here we see a predictable dominance of saving methods that involve reducing or eliminating discretionary expenses and looking for better deals. Those are normally the first steps people take under pricing pressure. 

In the detailed breakdown, we again see remarkable consistency across groups in many areas. All genders, ages, and income groups saw around 50% cutting back on dining out (not good news for restaurants). A large majority of categories saw between 40% and 50% choosing to drive less.

Higher-income Americans reported taking steps to reduce spending at nearly the same – and sometimes greater – rates than groups with lower incomes. We might not expect to see 70% of respondents with incomes between $175,000 and $199,000 shopping around for better prices and almost 60% using coupons and discounts, but that’s what the numbers showed.

What Do The Numbers Reveal?

We won’t pretend that this survey is the last word on the topic. The sample size is limited and there are many more questions that could be asked. At the same time, the figures do point to some conclusions.

The clearest takeaway is that both concern over rising prices and concrete actions based on that concern cut across the full spectrum of respondents. Even respondents in the higher income brackets demonstrated concern over rising prices and indicated that they were making changes in their spending and money management habits to adapt.

Another takeaway is that a significant number of people across all income and age brackets have already taken the most obvious steps toward managing inflation. They are already shopping for bargains and cutting back on discretionary expenses. 

That leaves the question of what comes next if inflation continues. Significant numbers of people are already delaying debt payments, taking on debt, and cutting back on investing. Those numbers are likely to grow. These may be rational or even necessary steps in the short term, but they can have risky long-term implications.

The last conclusion is something most of us already know. Inflation is a serious burden and it’s getting worse. We all have to deal with it in our own way according to our own needs and capacity. We’re all going to be watching carefully to see how long this goes on and whether traditional methods like rising interest rates can stop it.

Understanding inflation can help, but for the average consumer, the focus has to be on coping. We hope this survey will give some indication of how others are doing that!

The post Survey: What Are Americans Doing to Cope With Inflation? appeared first on FinMasters.

The post Inflation Survey: Impact and Responses appeared first on FinMasters.

The post Over 50% of Americans Admit to Keeping Financial Secrets From Their Partners (Survey) appeared first on FinMasters.

Please feel free to use the quick skip links below, or browse the data at your own pace.

Report Key Findings

Authorized User Credit Statistics

• How does getting added as an Authorized User Affect Credit Scores?
• Ethnicity: Comparing Authorized User Effect to Credit Scores
• Education: Comparing Authorized User Effect to Credit Scores
• Income: Comparing Authorized User Effect to Credit Scores
• Knowledge of Authorized User Effect
• Awareness: Paying to be an Authorized User

How Does Getting Added as an Authorized User Affect Credit Scores?

We found a direct correlation between authorized user status and good credit scores. In addition, there appears to be a direct correlation between credit awareness of those individuals who were added as an authorized user and those that had not been added.  

Of the respondents that had been added as an authorized user:

• Only 13% of authorized users had a credit score under 600, compared to 24.6% who are not authorized users.
• 46.4% had a 680 or higher credit score, compared to 27.7% who are not authorized users.
• 27.5% had a 639 or lower credit score, compared to 39.9% who are not authorized users.
• Only 10.1% didn’t know their credit score, compared with 21.8% who are not authorized users.
• 78.6% said they had a solid understanding of what affected their credit score, compared to 68.1% who had not been added as authorized users.

Comparing Authorized User Effect to Credit Scores by Ethnicity

Numerous studies have found that Black and Hispanic Americans’ credit scores are disproportionately lower, on average, than White and Asian Americans’ scores.

However

The survey revealed, as expected, that White and Asian respondents had a higher credit rating overall. However, 52.4% of non-white or Asian individuals that have been added as authorized users on a credit card had a credit rating of 680 or more. Comparing this to white and Asians who had not used the authorized user effect, only 30.5% of them had a credit score of 680 or above.

Comparing Authorized User Effect to Credit Scores by Education

Out of our respondents aged 20-29, the data below illustrates how education plays a role as an indicator of young Americans’ credit scores:

As you can see from the data above, education proved to be a leading indicator of someone’s credit score in our study.  From analyzing the data, 38.6% of all individuals who had a vocational, university, or post-graduate education had a credit score of 680 or higher.  However, this number dropped to 33.4% when the respondent had never heard of the authorized user strategy.

Where being added as an authorized user on someone’s credit card made the most significant impact was with individuals whose highest attained education was high school.  Only 19.3% of them had a credit score of 680+. However, as you can see below, these figures shifted dramatically to 36.0% for individuals that were added as authorized users.

Comparing Authorized User Effect to Credit Scores by Income

Out of our respondents aged 20-29, the data below illustrates how income plays a role as an indicator of young Americans’ credit scores:

Income is not directly used as a component of your credit score calculation, but it is a leading indicator of your score, as you can see from the data above.

Again, the authorized user effect was shown to trump income level effects in our study as well.  Overall, for individuals who earned $49,999 or less, only 24.6% of them had a credit score of 680+.  When we compare this to people from the same income-level group who were added as authorized users, 52.6% of them had a credit score of 680+.

Knowledge of the Authorized User Effect

We also surveyed our respondents regarding their knowledge of the authorized user effect and whether they had implemented it. Over a third wanted to use it but either didn’t know anyone to ask or were turned away by friends or family.

• 48.4% of Americans had never heard of the authorized user effect
• 12.1% have been successfully added to a friend or family member’s credit card
• 9.5% tried but couldn’t get anyone to add them to a card
• 30.0% didn’t have anyone to ask

Authorised user status can help your credit, but the benefits here go well beyond those provided simply by being an authorized user. The mere fact that an individual knows enough to ask to be an authorized user indicates some knowledge of credit, which will affect other factors as well. People who have friends and relatives with good credit also have better support networks and better credit information, all of which help to build credit.

U.S. Credit Score Statistics 2019

• U.S Credit Score Statistics by Age 20-29
• U.S. Average Income Level by Age 20-29

U.S Credit Score Statistics by Age 20-29

In the U.S. the best-known credit score provider is FICO, which ranges between 300 (being very poor) and 850 (being exceptional). Most scores in the U.S. would typically fall between 600 and 750 as an average – the higher the score, the more likely lenders will accept credit decisions as they know you’re more likely to repay your debt. This score is typically made up of credit utilization, credit mix, credit inquiries, payment history, and age of credit data.

Out of our respondents aged 20-29, here is the current credit score distribution:

• 38.1% of 20-29-year-old Americans had a 639 or lower credit score.
• 29.8%  had a 680 or higher credit score.
• 20.4% didn’t know their credit score.

U.S. Average Income Level by Age 20-29

In addition to the standard components that build up your credit score, lenders will also want to know your income, which is not a direct component in credit scoring. Lenders will, however, use your income as validation in terms of denying applications based on a debt-to-income ratio. Below, we looked at how credit scores of Americans aged 20-29 correlated to their annual income.

Out of our respondents aged 20-29, this was the income-to-credit-score correlation:

• 42.5% of America’s youth earning $49,999 or less per annum had a 639 or lower credit score, with only 24.6% reaching a score of over 680.
• 26.0% of America’s youth earning $50,000-$99,999 per annum had a 639 or lower credit score, with a significant jump of 42.3% reaching a score of over 680.
• 19.4% of America’s youth earning $100,000 or more per annum had a 639 or lower credit score, with a massive 48.4% reaching a score of over 680.

U.S. Credit Education Statistics

• U.S. Credit Education and Knowledge by Age 20-29
• U.S. Sources of Credit Education for Ages 20-29

U.S. Credit Education and Knowledge by Age 20-29

We asked respondents to rate their current knowledge of credit and the scoring system behind it. The report surprisingly uncovered that most young adults in America thought they had a solid understanding of credit. In fact, almost half of these respondents had low scores or no idea of their scores.

Out of our respondents aged 20-29, people with a self-proclaimed ‘strong’ credit knowledge polled:

• 39.5% had a credit score of 639 or lower, while 10.66% didn’t know their credit score (potentially almost half suffering from bad credit).
• 41.2% of respondents with a solid understanding of credit had no idea they can use bills like utilities and rent to improve their score.

U.S. Sources of Credit Education for Ages 20-29

We asked respondents how they had acquired their current knowledge of credit. The report surprisingly uncovered that self-taught Americans had the highest credit scores, on average, compared to those who had received their credit education from other sources.

Out of our respondents aged 20-29, this was the credit score data by credit education source:

• 14.8% of Americans with zero credit education had a 680 or higher credit score.
• 24.4% of Americans with high school or college credit education had a 680 or higher credit score.
• 30.5% of Americans learning from friends and family had a 680 or higher credit score.
• 35.5% of self-taught Americans had a 680 or higher credit score.

U.S. Credit Application Statistics

• U.S. Credit Applications Declined by Age 20-29
• Most Popular Bills Paid by American 20-29-Year-Olds
• Awareness: Rent & Utility Bills Helping Your Credit Score

U.S. Credit Applications Declined by Age 20-29

It can be disappointing and frustrating to have credit denied by a lender. For almost half of our young adult respondents, this was a common occurrence. Nearly half had been denied some form of credit application in the past 2 years. As we can see from the credit education data previously, many also have a poor understanding of credit.

Out of our respondents aged 20-29, below is the percentage of credit declines in the past 2 years:

• 45.6% of 20-29-year-old Americans have been declined credit in the past 2 years
• 27.7% got denied a credit card in the past 2 years.
• 14.2% got denied a cell phone purchase in the past 2 years.
• 13.3% got denied a car loan in the past 2 years.
• 10.7% got denied a property rental application in the past 2 years.

Most Popular Bills Paid by American 20-29-Year-Olds

With almost half of our respondents failing credit applications in the past 2 years and similar numbers having a poor understanding of credit, we wanted to highlight a door that could get opened for a considerable proportion of these young adults.

Below we can see that the majority of our young respondents had many active bills that were being paid on a regular basis. These people are, in most cases, navigating life with low credit scores that could receive an almost instant boost from reporting this data to credit bureaus using a variety of services.

Awareness: Rent & Utility Bills Helping Your Credit Score

Many of the services our respondents selected above are forms of rent or utility bills they pay regularly.  Unfortunately, their bill payments (even if timely and consistent) have NO impact on their credit score because these bills are not generally reported to the bureaus.  However, they can easily be reported to credit bureaus via rent reporting services.

Reporting of this additional data (known as “alternative data” in the credit space) could help the bureaus to get a better understanding of their reliability as potential borrowers.  Half of our respondents that rented and 1 in 3 with a low credit score had no idea they can use this data to boost their credit score.

• 51.2% of Americans renting property had no idea they can report rent and utility bill payments to improve their credit scores
• 35.8% of people that had a credit score of 639 or lower didn’t know they can improve it with rent and utility bill reporting services
• 1 in 4 people that didn’t know about utility reporting services also didn’t know their credit scores

The post Does Being an Authorized User Build Credit? New Study Says Yes appeared first on FinMasters.

Are financial advisors worth it? Many consumers aren’t sure, often because they aren’t sure what financial advisors do. Financial advice is a fragmented industry, only halfway to being an established profession. 

Consumers have traditionally associated financial advice with high-end investment advisors and financial planners that serve affluent clients. Most users don’t recognize that credit counselors, housing counselors, financial therapists, and other professionals who work with financially stressed clients are also financial advisors.

The definition and role of financial advisors are changing and evolving. We conducted this survey to understand if consumer attitudes toward financial advisors are also changing, and what this means for the future of financial advice.

Introduction

Financial advisors are not like other professionals. With a lawyer, accountant, or a doctor, you have a sense that they have been through a common set of hurdles (medical school, the bar exam) and you can trust them to maintain certain standards. 

A lawyer, for example, can be expected not to break client privilege, just as the doctor can be trusted not to prescribe inappropriate medication. If they do either of these things, they run the risk of being disbarred or struck from the register, after which they will no longer hold professional status.

A profession is different from an industry. In an industry, the aim of the provider is to sell you as much of a given product or service as possible. A double-glazing salesman doesn’t have a fiduciary duty to ensure you get the best double glazing at the lowest price – that’s your job as a consumer. As the lawyers might put it, the principle of ‘caveat emptor’ (buyer beware) applies.

Financial advice is – currently – somewhere in between profession and industry. Advisors don’t have the same professional standing that a doctor or surgeon might have, but at the same time, they enjoy more prestige than the car salesman or estate agent.

A big part of the problem is that people don’t have a clear view of what financial advice is. And this is no wonder, for three reasons:

1. The financial advisor community is highly fragmented. Since there is no single route to professional status, anyone can claim the role of ‘wealth advisor’, even if they have no qualifications at all. Consequently, the community contains the whole gamut – from actual salesmen pushing financial products to genuine experts who integrate knowledge from multiple domains to solve complex financial problems.
2. There aren’t a lot of movies or TV shows about financial advisors. This may sound like a minor point, until you consider how many legal and medical dramas have been produced. By contrast, there is no clear view of a financial advisor in the public consciousness. Financial advice is, sadly, not particularly dramatic, and so Hollywood tends to focus on Wall Street capers and corporate high-jinks, rather than tax-loss harvesting for Mr. and Mrs. Jones. 
3. Financial advice has evolved considerably in recent decades. For our grandparents, “financial advice” consisted of a broker helping you to buy and sell individual stocks and bonds. Today, market timing and investment selection is only part of investment management, which is itself only a part of the broader field of wealth management as practiced by its more advanced practitioners today. It covers many related fields, some of which overlap with law (estate planning) and accounting (tax strategy). It is more akin to problem-solving than market-trading, and requires a completely different skillset

The fragmented and undefined market for financial advice is a big problem for consumers and genuine financial advisors. The lack of clarity around financial advice allows a lot of genuinely bad actors to continue to operate under its cover, typically at the expense of unwitting clients who lose money on dubious financial products, and honest advisors whose reputation suffers from the taint of association.

This may be changing. One of the benefits of the internet age is the transparency it has brought to many industries that previously depended on or traded upon secrecy.

The financial crisis of 2008 opened many eyes to the borderline (and actual) fraud that is routinely perpetrated by the institutions who are charged with our financial wellbeing. A better informed and more demanding consumer could be just what the financial advice industry/profession needs to encourage it to raise its game.

The Results

The survey was conducted in October 2021 and consists of responses from around 620 participants from across the USA. The respondents were all from households earning above $100k in annual income. We asked the respondents to answer the following questions:

1. What Is the Point of Having a Financial Advisor?
2. Are Financial Advisors Worth Their Fees?
3. Do You Have a Financial Advisor? Do You Need One?
4. What Has Been Your Experience of Financial Advice?
5. How Would You Define the Value of a Financial Advisor in One Sentence?

What Is the Point of Having a Financial Advisor?

Not so long ago financial advice was limited to advising investors on what stock to buy or when to make a trade. There are still advisors who focus on security selection and market timing as their main source of added value, but they are better termed ‘asset managers’ in that their goal is simply to maximize risk-adjusted returns. 

Even if it is achievable, simply targeting higher returns is a narrow set of objectives and does not take into account the point of investing, which is not ‘to become richer’ but to provide a means of achieving one’s goals. 

The baseline goal for most people is ensuring that they accumulate assets to remain self-sufficient after retirement. With the rise of the baby boomer generation, the financial advice industry has developed a suite of products and services to help meet this need. For the advisor, retirees are attractive clients because they are typically in a position of substantial wealth, having saved consistently over the course of a lifetime.

The baseline goal for most people is ensuring that they accumulate assets to remain self-sufficient after #retirement.

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However, ‘retirement management’ is only marginally broader than ‘asset management’ as a definition of financial advice, since it restricts advice to those aged 55 and over (with sufficient wealth to invest). Since everyone has financial needs, financial advice should ideally address people at all life stages, and encompass many questions besides retirement. 

The popular framework developed by Maslow sets out a hierarchy of needs, beginning with fulfilling bare necessities (such as food and shelter) and progressing upwards to needs more related to fulfillment and self-actualization (e.g. achieving one’s potential) than mere survival.

The evolved advisor (also known as a comprehensive financial planner) helps a client on every level of the Maslow hierarchy and will begin the relationship by understanding his or her aspirations and goals relating to career, family, and legacy.

Home-buying, credit and debt management, and college savings plans are all important financial topics that warrant advice and are typically most pertinent for a client in their early or mid-career. A truly holistic advisor, therefore, serves clients of every age and supports them at every stage.

If we examine the survey results, we see – encouragingly – that a majority of clients see financial advice as more than simply ‘getting higher returns’. The largest response group (49%) believes that the value of advice is more related to setting and achieving goals, moving the value of the service further towards the higher end of the Maslow pyramid.

Later in Question 5 (“​​How would you define the value of a financial advisor in one sentence?”) those who answered ‘Getting higher than average returns’ in this question tended to define the value of financial advice in terms of the portfolio, the market, and outperformance. 

Those who answered ‘Helping me set and achieve financial goals’ on the other hand, were more likely to mention other concerns such as plans for their children, tax implications of financial decisions, and support with their business.

The overall conclusion is that people are aware that advisors can, or at least should, be broader in their scope of services than simply delivering excess returns (or as mere ‘conduits’ as one skeptical respondent put it, presumably referring to the practice of pushing financial products).

As consumers become more assertive in this regard, it is to be hoped that the population of financial advisors will begin to resemble this updated set of expectations.

Are Financial Advisors Worth It? (2021 Survey)

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Are Financial Advisors Worth Their Fees?

Because the value of a financial advisor is such a confusing topic, it is only natural that the question of value in relation to fees is similarly fraught.

There’s a growing debate over how advisors should charge consumers for advice. In some cases, this is due to regulation (MiFID in Europe, Reg BI in the US). There is also an ongoing internal debate within the advice community as to which is the best fee model (typically, it must be said, conducted in terms of what is best for the advisor!).

Consumers are notably absent from the debate. To use the words of one executive, financial advice is ‘sold not bought’ – that is to say, people are expected not to understand the product or the fee structure, and take whatever they are given (or whatever the regulator allows).

This is likely to change in the future due to the heightened transparency of the digital age. People have access to lower-cost investment options (e.g. through Robo-advisors). While these are unlikely to replace human financial advisors as initially feared, it is nonetheless placing pressure on fees.

Why? Because even if the value of financial advice has expanded from just investments to a broader range of financial topics, the fee model remains tied to the value of the portfolio in most cases, thanks to the growing dominance of the AUM fee model (charging an annual percentage fee based on the assets under management).

Advisors don’t want to move away from the AUM fee model because it is very profitable and has up to now worked well for them. If clients start to challenge the fee level, this could make the model highly unprofitable. Owing to fixed costs, a mere 30% reduction in fees can translate to a 100% decrease in profits.

What did the data show?

Advisors can take comfort from the fact that over 90% of respondents acknowledged that at least some advisors are worth their fees. This means that advisors who can demonstrate value for money are safe from fee pressure for the time being.

Viewed from another perspective though, around 85% of respondents did not agree with the statement that most financial advisors are worth the money. This could imply they believe the true proportion of ‘good’ financial advisors is fewer than half! 

That’s less of an endorsement. While professional advisors may be shielded, fee pressure is very much on the cards for the financial advice ‘industry’.

Do You Have a Financial Advisor? Do You Need One?

As we covered in the introduction, because there is no single recognized route to professional status, individuals of various backgrounds are able to hold themselves out as financial advisors. This makes it hard for consumers to distinguish the highly qualified from those less so. 

Normally, one would use official designations (e.g CPA, MD)  to determine the quality of a professional. There are so many qualifications (and of such varying quality) in the field of financial advice that the result is a confusing alphabet soup of acronyms, which in all likelihood only serves to confuse rather than inform potential clients.

In the case of the US, the reason for the confusion is historical. Professor Nathan Harness of Texas A&M has used the metaphor of different ‘tribes’ to explain the fragmentation of financial advice. 

He traces each of the modern-day “tribes” back to their origin. One advisor might originate from a background in product distribution, where the aim is to maximize one’s close rate. Another might come from the world of accounting and CPAs, where the fiduciary culture is dominant.

From a client’s perspective, however, it may appear as though both individuals are performing the same function, particularly if they are using the same language. A financial plan prepared by an insurance salesperson, however, is more likely to be a vehicle to sell insurance.

The service that is provided by a financial advisor with roots in the world of accounting is more likely to be the kind of advice that most respondents to this survey say they want, wherein the advisor optimizes for the client’s long-term best interests.

All of this makes the results of the survey question somewhat difficult to interpret. 

While the majority of respondents (57%) believe they have a financial advisor, it is difficult to know which tribe the advisor comes from or what type of advice is being delivered. From our perspective, the proportion of those receiving true financial advice (in the comprehensive sense) is likely to be far lower than 57%. 

The fact that 20% of participants don’t believe they need a financial advisor gives a clearer message. By examining how they answered Question 5 (“How would you define the value of financial advice in a single sentence?”), we can examine the rationale behind their responses. 

Interestingly, only some of these responses were from true “skeptics” who believe that financial advice is a waste of time. Rather, this group consisted mainly of respondents who believed they were able to handle matters for themselves (more about this later). In other words, advice is a valuable service for those who need it.

The group that said they ‘can’t afford a financial advisor’ is also significant. 

As advisors have moved to an AUM-based pricing approach, it has become necessary to restrict access to those who have sufficient assets to manage (typically 500k or above), otherwise the fees are too low to pay for the service. 

This cut-off point eliminates a large portion of the population below retirement age (who either lack the assets or do not have them available to hand over to be managed), including those who might otherwise have been happy to pay by other means (e.g. % of salary, by the hour).

One of the hallmarks of a true profession is that it is open to all – law, medicine, and accounting are services that the entire population has access to. Removing this unnecessary barrier will be key to unlocking the true potential of financial advice to create wealthy individuals rather than serve the already wealthy. 

In the future, this chart may look very different, with the overwhelming majority of respondents sitting in column 3 (“I have a financial advisor”). There may also be a common consensus on what a ‘financial advisor’ is and does.

What Has Been Your Experience of Financial Advice?

Encouragingly for financial advisors, the number of ‘negative’ experiences is tiny (around 5%) versus the 47% who said their experiences had been positive. 

However, 42% rated their experience as neutral, which is a very large percentage for a response that is essentially non-committal. After all, how many important things are consumers generally ‘neutral’ about?

This brings us back to the common theme in this report: when it comes to financial advice, consumers aren’t clear on what is going on, what they are receiving, and what its value is.

Digging deeper, we can look at how each group responded in Question 5 (“How would you define the value of financial advice in a single sentence?”).

Positive respondents, as might be expected, gave definitions that focused on guidance, goals, and value-added services such as tax advice. A significant minority focused on investment returns, implying that there is still a good market for advisors who lead with this as their main proposition.

Negative respondents tended to question the entire value of the financial advice offering (e.g. “A waste of time and money!”), and some comments (e.g. “Glorified salesperson”)  implied that the respondent had encountered a product-salesperson who had not put the client’s interest first. While apparently rare, these negative experiences clearly engender a hostile attitude to the concept of advice in general.

Neutral respondents are the most interesting category. The skeptical comments in this category were more nuanced than in the ‘Negative’ contingent, with concerns mainly centered around uncertainty (“I do not understand how they make money”) and evoking a general sense of wariness rather than absolute disbelief. Many respondents gave clear and concise definitions of what financial advice could and should be. The problem appeared to be they had not experienced it themselves.

As remarked above, the sheer size of the neutral category is the main takeaway – and puzzle – in this question. We would argue that this indicates confusion more than anything else, leading to caution. The danger is that a lack of passionate devotees suggests vulnerability to alternative solutions that may present themselves.

How Would You Define the Value of a Financial Advisor in One Sentence?

Given that most financial advisors would struggle to answer this (trillion-dollar) question concisely and accurately, we were impressed with the range of the responses we received! Viewed in composite, it was possible to derive a fairly detailed view of the perception of financial advice in the mind of the everyday consumer. 

Certain themes emerged, which we have set out below.

Investment Management Is Still a Draw for Some (For Now)

A sizable portion of the participants (17%) responded to the question purely in terms of investment results. For this group, the attraction of an advisor rests on the ability to generate higher returns than they would be able to do on their own. In the words of one respondent, “If they produce, they’re okay.”

As stated above, the idea of advice as primarily about generating high returns is becoming outdated (not least because it is statistically highly unlikely that your advisor will be able to beat the majority of other investors). But for many, the story of the market-beating advisor remains potent.

In this area, respondents seem to value advisors in three ways.

1. The first is knowledge – advisors are perceived to have genuine expertise in managing money (to quote one respondent, “Navigates a complicated investment landscape that I myself do not understand”).
2. Linked to this is the idea that advisors have access to ‘deals and resources’ not available to the everyday consumer, much like a mortgage broker or (in the pre-internet days) travel agent.
3. Also very common was the idea that consumers could perform investing by themselves if only they had the time. In the words of one respondent, “I don’t have the time or the desire to watch the market or understand products and their implications.” The idea is that an advisor is an outsource partner who takes care of an aspect of your life on your behalf.

It remains to be seen how sustainable the investment-led proposition will be, but technology and increasingly self-reliant customer attitudes may mean that few advisors can continue to pose as stock-market gurus. For now, as we have said, this market niche appears solid.

A Broader View of Advice

Only 5% of respondents referred to retirement directly, with most people referencing broader aims. While the statements these respondents made were naturally very high-level, many were excellent descriptions of the value of a comprehensive advisor, and could even be used as marketing taglines by advice firms. For example:

• “Professional guidance on difficult decisions”
• “Helping me navigate my financial life”
• “Puts my mind at ease about my financial future”
• “Gives you confidence you are making good decisions with your money.”
• “Making sense out of mayhem.”

One respondent even raised the point that advisors potentially fulfill a gap in our current education system. “Since schools do not teach financial literacy, someone has to.” Other common ideas used to describe the value of an advisor include:

• Keeping me on track
• Keeping me from doing something stupid
• Making better financial decisions

Although ‘peace of mind’ is a cliche when talking about the benefits of financial advice, many respondents referred to the advisor as a person who “removes the worry” regarding their future. This includes in particular stressful life events such as bereavement (“Reassuring that someone will help my spouse if I die”.)

Navigating an Increasingly Complex World

There was a definite indication from various responses that the need for financial advice is actually increasing in today’s world, as a result of the accelerating pace of change and growing complexity of life. 

This could be due to Covid, cryptocurrencies, geopolitical shifts – but the point is that for the average consumer, the world they face is not the one in which they grew up, and a trusted advisor is more important than ever. 

This means that people who did not consider a financial advisor necessary before may now be changing their minds on the subject. This is even winning over former-skeptics, as we see from the comment, “A fiduciary is necessary with our government and financial institutions as unstable as they are now.  As much as I dislike it, they have become necessary now for support.”

Finding the Right Advisor Can Be a Lottery

There is a paradox at the heart of the feedback. In spite of negative comments from some (more on this in the next section), it was noticeable how warmly many other respondents spoke about the good advice that they had received in the past. 

As already observed, attitudes to financial advice are – by and large – more positive than negative.

The problem is that this positive attitude is undermined by the coexistence of good and bad actors in the advice category, and the difficulty of distinguishing between them as a potential client. 

Two representative comments are “An honest advisor is worth their weight in gold,” or “If they’re honest and good at their job, then they’re worth working with.” These statements are endorsements of good advisors, but the fact that the writer feels the need to explicitly call out the word ‘honest’ implies that this should not be the default expectation.

Reasons for Skepticism: More About Advisors Than Advice

Only 11% of definitions indicated an explicitly skeptical or jaded attitude to the value of financial advice. These 60 responses ranged from outright cynicism (“Most advisers give the same advice to each client.”) to caution (“[The value] depends entirely on the advisor”) and grudging acceptance (“A necessary evil.”)

Believing that a service has no value and mistrusting those who provide it are two different things. Even among the skeptics, those who believe that advice is fundamentally worthless were in the minority. The questionable point for most appears to be the integrity of advisors themselves.

As one respondent put it, “He/she should be looking out for me the investor, not ways for them to make more money through me with no regard to my investment return.” Fixing the reputation of advisors by instilling a true fiduciary approach (as opposed to a sales culture) will go a long way to winning over the skeptics. 

Dissatisfaction With the Fee Model

Another strain of frustration came from a sense that financial advisors are only interested in those who are already wealthy, rather than helping people become wealthy. As one respondent wryly observed, “[Financial advisors] are for people who don’t need financial advisors.” 

This is connected to the point around the fee model. There is something perverse about requiring a high asset minimum in order to accept a client, like a doctor with a minimum health requirement, or a lawyer who only takes easy cases. The fact that clients are sensing this should be a warning sign.

Another telling quotation came from a respondent who is not only receiving advice but is pro-advice, not a skeptic. “Though I might be paying more than I’m getting out of it, if I didn’t have a planner I’d be more worried about retirement.”

This is interesting because, in the very act of acknowledging the value and necessity of advice, the client is in the back of her mind wondering if she is getting overcharged.

This highlights an additional problem with the asset-based fee model: calculating the value of advice as a % of the assets invested makes far less sense when the scope of advice being given is broader than just the investments. The fee goes up and down based on the value of the assets, rather than the service received, and hence clients are left wondering if they are paying the right amount.

Closing Words

To sum up, financial advice has a solid foundation but has the potential to be so much more than it currently is. Chiefly, its mission should be to restrict access to the title of “financial advisor” by revising the requirements and opening up access to advice by restructuring the fee model.

Both consumers and advisors should recognize that many of the people who most need financial advice are not in a position to pay much for it. That has created industries like credit counseling, financial therapy, and a range of services designed to provide advice to financially stressed – or financially desperate – individuals. Practitioners in this space are also financial advisors. And should be recognized as such.

While certain types of advice may be displaced in the future, the need for a financial navigator has never been greater, and it is time that the industry evolves into the profession this new world requires.

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The post Are Financial Advisors Worth It? (Survey) appeared first on FinMasters.

Over 88% of Survey Respondents Report a Significant Impact on Household Budget

We almost forgot about inflation. For over 25 years the annual increase in the Consumer Price Index has been below historical averages. For most of that time, inflation has held near or below 2% a year, a barely noticeable level.

Those days are gone. 2022 has seen inflation soar to levels unseen since the 1980s, as pandemic-driven supply chain crunches and Russia’s war on Ukraine combine to hold the supply of goods well below soaring post-pandemic demand.

The Federal Reserve’s response has been to push interest rates up, a conventional anti-inflation measure that has only increased the stress on consumers who have resorted to loans and credit cards to make ends meet as prices outstrip wages.

The response of consumers – many of whom are dealing with high inflation for the first time in their adult lives – has been more diverse. We wanted to know more about how Americans are coping with inflation, so we designed a survey to find out.

The post Americans Are Falling Deeper in Debt as Inflation Continues to Rise appeared first on FinMasters.

The post Inflation Is Taking Toll on American Mental Health appeared first on FinMasters.

The post How Inflation Stole Christmas appeared first on FinMasters.