What the research says about cash flow management and seeing a financial adviser

“Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings]  and six [pence], result happiness.

Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.”

Mr Micawber,
Charles Dickens’ David Copperfield

As can be seen from the quote, the fundamentals of cash management are not a new breakthrough in economic
theory. It’s simple common sense that if you have more money going out than coming in, you are going to have

In the 19th Century, with a cash economy and hand written book-keeping, it might have been a simple thing to keep track of, but in today’s world, people find it far from simple. With credit cards, loans, mortgages, automatic payments and fees, keeping track of money has never been more complicated.

However the fundamentals that applied in Dickens’ time still apply today and there is plenty of research around that proves not only this, but also confirms the benefits of goal setting and receiving sound financial advice.

It’s not about income

Choice, Chance and Wealth Dispersion at Retirement, Steven F Venti and David A. Wise, National Bureau of Economic Research

It’s natural for people to blame their income for the state of their financial affairs, but the money coming in is just one half of the equation and, not the most important half. In this study, two economics professors researched the issue of wealth in the US.

They looked at almost 4,000 households whose heads were near retirement age. They found some interesting results.

There was a huge variation in wealth at every income level: many low-income families had almost nothing, but so did many high-income families. Income explained as little as 5% of wealth dispersion.

Chance events such as an inheritance, unexpected expenses, marital status or number of children accounted for 4% of wealth dispersion. Investment choices were a little more influential, explaining about 7%.

This study found that the major determinant of wealth creation was simply how much individuals chose to save: ‘the differences in saving choices among households with similar lifetime earnings lead to vastly different levels of asset accumulation.

Setting goals makes a difference

Written Goal Study, Gail Mathews, PHD,
Dominican University

There is a frequently mentioned ‘study’ of goals that stated that 3% of a graduating class had written specific goals for their future. Twenty years down the track they were said to be earning 10 times more than their classmates who had not written their goals. This would be a great statistic if it were true, but sadly it’s an urban myth. No such study was ever done.

After establishing this fictitious study didn’t exist, Dr Gail Mathews set about to examine the impact of goal setting. In her research, participants were recruited from a wide range of backgrounds, six different countries (including Australia) and aged between 23 and 72. They were assigned to five different groups:

• Group 1 were asked to simply think about goals they wanted to achieve over the next four weeks without writing them down.
• Group 2 were asked to write their goals down.
•Group 3 wrote their goals and formulated action commitments.
• Group 4 also sent their goals and commitments to a friend.
• Group 5 added sending weekly progress reports to the friend.

At the end of the four weeks the participants rated their progress and the degree to which they had accomplished
their goals.

The conclusions supported the value of goal setting with the following findings:

• Writing down goals has a positive effect: all the groups that wrote down their goals (groups 2-5) accomplished significantly more.
• A public commitment makes a difference: those who sent their commitments to a friend achieved more than those who simply wrote their goals and action commitments.
• Accountability had a strong affect: those who sent weekly progress reports achieved much more than all the other

For those seeking to get their finances in order it proves setting goals down with a financial adviser and having your
adviser check on progress and offer support means that you will achieve more.

Quantifying the value of advice
Value Proposition of Financial Advisory Networks, KPMG Econtech, 2011

General goal setting is important, but one question that often arises is whether the cost of professional financial advice is worth it when it comes to saving money. This study showed the answer is a clear ‘yes’.

This study compared people who developed a savings plan through a financial adviser with those who tried to save on their own. The results showed that after taking considering the cost of developing the plan, people with an adviser saved an additional $1,590 a year compared to similar individuals without an adviser.

The study also looked at the longer-term impact of how these additional savings accumulated over time to an average wealth at retirement (age 65).

The estimates allowed for both the costs of the saving plan and for the different savings patterns of people at different ages. Remember these are additional savings compared to someone without financial advice.

Additional savings at retirement if starting at age 30 $91,000
Additional savings at retirement if starting at age 45 $80,000
Additional savings at retirement if starting at age 60 $29,000

These figures show that putting a savings plan in action with a financial adviser has a strong impact for all age groups. They certainly lay to rest the myth that it’s ‘too late’ to see an adviser about implementing a savings plans to boost retirement income.

Broader implications
The same study also looked at the economy-wide impact of more Australians receiving financial advice for saving. It found that if an extra 5% of Australians received financial advice that would result in an additional $4.2 billion (in 2009/10 dollars) in national savings by 2016/17, or the equivalent of 0.3% of GDP. People are not just helping themselves, by seeing a financial adviser, they’re helping the country too.

Living for today
The Value of Financial Planning, Financial Planning Standards Council, Canada 2013

One of the myths about seeking help from a financial adviser is that it’s all about sacrificing now for a benefit sometime in the future. However this recent study of over 15,000 Canadians revealed very positive attitudes about current lifestyle among people who sought help from an adviser. More people who had a comprehensive plan from an adviser felt they had improved their ability to save in the last five years:
• Comprehensive plan: 62%
• No plan: 40%

These results might be expected, but perhaps more surprising were the differences in how much people felt able to spend money today.

Common sense backed by research
It’s common sense that getting your finances in order by managing your cash flow better will help you do more in life. However all the research here quantifies that common sense. It proves that seeking help from a financial adviser and setting goals will help you save more. The benefits of this are not only for ‘some time in the future’, but for right now too. Getting good advice enables you to live the life you want now, to enjoy your money and to splurge from time to time and still save for the future. It also shows that it is never too late (or too soon!) to seek help. These results might be expected, but perhaps more surprising were the differences in how much people felt able to spend money today