Those Who Have Advisors Are More Likely To Diversify Holdings

By Linda Koco

Which insurance and financial products might prompt a consumer to do a better job with financial planning? Northwestern Mutual put that question to American adults earlier this year as part of a wide-ranging study it commissioned from Harris Poll to explore Americans’ financial attitudes and behaviors.

The answers show that Americans really do lean toward diversifying their holdings rather than relying on just a few holding categories, according to the insurer.

In all, consumers checked off 14 product categories they see as supportive of financial planning. These include personal insurance products such as permanent life, term life, annuities, long-term care insurance and disability insurance, as well as savings accounts, individual retirement accounts, stocks, mutual funds, real estate and bonds.

Even automated advisory services made the list, but at a very small percentage.

But although Americans seem to be taking the well-known rule of thumb to heart (about not putting all your eggs in one basket), the tendency to diversify is more pronounced among Americans who have an advisor, the study found.

For instance, among those who use an advisor, three-fourths (77 percent) put a savings account on their list of products that might prompt them to “get better about financial planning.” By comparison, only 61 percent of those who do not have an advisor said the same. And while 49 percent of the advised named stocks to the same list of financial products, only 17 percent of the non-advised did the same.

In some categories, a huge differential exists between the views of the advised versus the non-advised. For instance, 61 percent of the advised group mentioned IRAs while only 23 percent of the non-advised said the same.

Diversifying with annuities and insurance too

Insurance professionals will be interested to note that there are wide differentials where personal insurance products are concerned as well.

For instance, 28 percent of the more than 1,200 consumers who have an advisor named an annuity as a product that might prompt them to get better about their financial planning. That is more than five times the 5 percent of non-advised consumers who named annuities.

Similarly, 20 percent of the advised consumers named long-term care insurance as a product that might prompt better financial planning. That’s five times the 4 percent of non-advised consumers who mentioned long-term care insurance in this context.

Life insurance products drew higher percentages among advised consumers as well, but the gap between advised and non-advised consumers was narrower.

For instance, 38 percent of consumers who have advisors named permanent life insurance as something that might prompt them to get better about their financial planning. That is nearly 2.5 times the 14 percent with no advisor who said the same. And 29 percent of the advised named term life as a possible prompter; this is about 1.8 percent times the 16 percent of non-advised adults who said the same.

Altogether, the insurance findings show that consumers who have advisors are more inclined than those without to think broadly about the types of insurance and financial products they might consider for their portfolios.

Merits of diversification

The insight can be useful when advisors are working with customers who do not know what they want and need, and who may ask how other people approach financial planning. The discussion can open up the topic about the merits of diversification.

Northwestern Mutual, in charting the results, put the trends identified in the study in the context of a benefit to consumers who use advisors. A diversified portfolio is one of the “benefits of working with an advisor,” the insurer said in labeling its chart.

The study identified some other benefits to working with advisors too. These include having more financial security (89 percent of advised consumers said they feel very secure or secure), and having better financial habits (78 percent of the advised are savers and 64 percent have more savings than debt).

A finding that may interest an advisor’s customers is that the large majority of consumers who work with advisors report experiencing happiness in retirement (88 percent) or expecting it (79 percent). Happiness is not a financial amount, but a lot of people do value happiness as a quality-of-life issue they seek for their retirement years.

When there is no advisor in the picture

Despite the positives expressed by advised consumers, the Harris poll found that many consumers are not using advisors. In fact, 69 percent of more than 2,000 adults polled by Harris said they do not have a financial representative or advisor.

That may help explain why, although 40 percent reported having set financial goals, only 20 percent said they have developed a written financial plan either on their own (12 percent) or with an advisor (8 percent).

This low percentage showed up even though 30 percent said they are “not at all financially prepared” to live to the relatively “young” age of 75, and 31 percent expressed the belief that they have a greater than a 50 percent chance of outliving their savings. Among those who are working, 62 percent said they are expecting to delay retirement by necessity.

The researchers said that more than half (58 percent) believe their financial planning needs improvement. This suggests consumers are aware of their financial vulnerabilities. Yet when asked what steps they have taken to plan for their financial future, 34 percent said none. And despite expressing serious concerns about retirement, 43 percent said they have not spoken to anyone about retirement planning.

“Ignoring the problem doesn't make it go away,” said Northwestern Mutual vice president Steve Sperka in a statement on the findings. “This should all be addressed in a financial plan that sees beyond the short-term."

InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].