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Investment outperformance forms a key part of financial advice. But what impact can lifestyle changes, such as cutting discretionary spending, play? Investment returns may grab the headlines but saving can provide a greater bang for buck. It comes down to the mix of risk and return as the industry moves away from predominately selling investment products and increasingly towards goals-based advice. Investment success is about far more than outperforming a benchmark based on a client’s risk tolerance. That plays just a small role in helping people to build wealth in support of their specific goals over time, such as buying a house or funding their children’s education.

Why saving can beat investing

Most people attempt to budget according to the corporate regulator’s Australian Financial Attitudes and Behaviour Tracker. Unfortunately most of this activity doesn’t amount to much more than writing down some notes or checking bank and credit card statements for unusual entries. This is similar to going for a walk around the block and calling it exercise. A good financial planner providing high-quality holistic advice can have the same positive impact on someone’s financial future as a personal trainer can have on someone’s health. An analysis of the Moneysoft database reveals just how significant the impact of high-quality financial advice can be. It shows a near 50 per cent reduction over 12 months in clients’ discretionary (irregular) expenses such as entertainment, travel, hobbies, credit card repayments etc. Average client discretionary expenses were fairly flat over the first six months as the benefits of financial coaching kick in and clients’ change their spending behaviour. We will delve more heavily into how financial planners help their clients to achieve these changes – and where clients direct these savings – in future articles.

Focus on returns but don’t neglect saving  

The benefits of this type of saving stack up well compared to investing. Let’s take a hypothetical client, Sara, who wants to buy her first home. In this simplified example, Sara wants to save a 25 per cent deposit to buy a $650,000 apartment in Sydney. She has already saved half the deposit ($81,250) by living with her parents and adds an extra $1500 a month towards her target of $162,500. She invests in a balanced fund which we assume returns an annualised 5.7 per cent a year.* At this rate, she believes she’ll reach her target in three years based on a simple compound interest calculation. However, Sara doesn’t enjoy living with her parents and, as a Sydneysider, wants to get rich as quickly as possible by owning residential property (her adviser has had long conversations about the benefits of diversification to no avail). She can target higher investment returns with her deposit but will need to take on more risk. She is also not guaranteed to receive 5.7 per cent a year while the sequence of returns will also impact her actual return. Sara is highly motivated so she increases her saving rate by $500 (to $2000 in total)After the same three years she has now saved $182,096 – an extra 12 per cent – which she will use on her mortgage. To achieve the same result, Sara’s balanced fund manager would need to post an annualised post-tax return of 10.1 per cent a year. This is not a realistic expectation, at least without taking on substantial investment risk far outside of her risk tolerance. This is not to say successful investing isn’t important. The power of compound interest and the extra gains that even small increases in net returns can generate shouldn’t be underestimated, particularly for long-term savings such as superannuation. However, the bulk of household wealth remains outside of super, with the family home the largest store of wealth. This represents an opportunity for financial planners; allowing them to establish long-lasting relationships with previously un-addressable clients, including younger Gen X and Ys. These new clients, in turn, can experience the immediate benefits of financial advice regardless of how markets perform. As the foundation for good financial advice, financial advisers and planners offering money management and cash flow services can certainly help clients when it comes to getting on top of their finances and building their wealth for the future. Contact us if you would to learn more about Moneysoft solutions to support your business growth - either Lite  or Pro    *Based on hypothetical 10-year long-term returns over the decade ended December 2015 in the ASX Russell Long-term Investing Report.