Until now there have been very limited tools available to help financial planners benchmark other aspects of clients’ overall financial position. Imagine how powerful it would be for an adviser tobe able to back up their advice to a spendthrift client that they need to spend less and save more, if they could communicate what the average or top quartile superannuation balance and living expenses for someone in their client’s peer group is. Creating the case for change becomes easier when armed with more facts and figures.
Benchmarking is relevant in establishing a client’s current position. Dr Douglas Turek, a Melbourne-based planner and former management consultant, developed Wealth benchmarks as a response to clients asking how they were doing in comparison to their peers. It is a free online tool for advisers and their clients to compare and assess their current financial position.
It was launched in January 2007 and is available now at www.wealthbenchmarks.com.au. The true value add provided by the financial planning profession has been obscured by the focus on other issues in recent years. This new tool helps advisers get back on the front foot with their clients and prospects. Turek’s experiences running benchmarking studies for large organisations in the financial services industry and more recently as an adviser have combined to produce a tool with wide appeal.
The service operates on a no names, no addresses, no contact, no referrals and no charge basis. It can be offered as an alternative fact find to clients who would otherwise not bring a useful fact base to a first meeting with an adviser. Additional value could be provided to ongoing clients at a review meeting where their overall circumstances would be reviewed.
An interesting outcome of designing a benchmarking regime is the development of several unique personal finance ratios, which may over time become a greater part of how we think andcommunicate to our clients about their personal wealth. Wealth benchmarks introduces both some obvious and some unique ratios borrowing from practices used by stock analysts to compare companies of various sizes within a common peer group.
Five of the most important ratios delivered following a 10 question “Quick Check” survey include:
. Investment and lifestyle asset ratios that measure the relative composition of client assets into those that are investment related versus those that are lifestyle related. In my experience it is not uncommon to find otherwise perceived wealthy clients with a net worth of several million dollars having more than 90 per cent of assets in the family and holiday home.
. Debt asset and servicing ratios that help people understand how much debt they have relative to their total assets and the cost of servicing that debt relative to their after-tax income. Knowing these ratios is important to demonstrate the risks of carrying excessive debt or to point out a lazy balance sheet that for some could be used to grow wealth through prudent, long-term gearing.
. Gross savings rate, which relates to after-tax ordinary savings, debt principal repaid and after-tax money contributed to super. I am surprised how few Australians know what their savings rate is and suspect more might think about contributing to super when they see this included.
. Investment wealth-expense cover, which relates net worth, excluding lifestyle assets, to core annual expenses, excluding debt servicing costs. This important ratio hints at the amount of net investment wealth available to meet expenditure. Unfortunately for many this parameter is negative, illustrating that net worth is dominated by lifestyle assets not yet fully owned.
. Wealth accumulation performance compares net worth to that expected given one’s age and income following a correlation observed in the United States by Stanley and Danko in The Millionaire Next Door.
A number of other interesting ratios are calculated where additional detail is provided. Several insurance ratios hint at the amount of cover and savings clients have relative to expense needs. A number of interesting expense ratios will make your clients think more about how much they are spending. Included are hourly-living and hourly-working expense rates. It would be great if “Compare the Pair” became instead an advertisement that encouraged people to properly structure their total financial affairs.
Imagine two cars pulled up at a traffic light, one a well-loved Falcon, the other an impressive new Range Rover. Only following benchmarking analysis do we find contrary to first impressions the more modest Falcondriving family (which incidentally has benefited from a relationship with a trusted adviser for many years) can enjoy many years of self-funded annual expenses while our other family is still yet to pay off lifestyle assets.
