Working with a good financial planner should leave you in no doubt about the value you are gaining from the relationship.
In an ideal world, the financial gain you’re making from financial planning will cover at least the fees you’re paying to your planner, meaning it effectively pays for itself.
We demonstrate this each year by sharing a “Value Statement” that sets out, where possible, what we’ve achieved for our clients in pounds and pence.
This makes any financial gain above the fees you pay, along with any non-financial benefits of financial planning, a bonus.
An extra 3% per annum1
Vanguard Adviser Alpha was a concept created in 2001 by one of the world’s biggest fund managers.
Their ongoing study shows that good financial planning adds value in many ways, far beyond the scope of simply selecting better investments. Vanguard estimates the additional value added to be 3% per annum.
That equates to an extra £30,000 each year on a £1 million portfolio.
We want to remove some of the mystery around how financial planners add value, so this is the first of two pieces we’re writing on this topic.
Below, we look at some of the ways we help our clients to have more money in their pocket. And, next month, we’ll look at the non-financial benefits engaging a financial planner can offer.
1. Cost savings on your investment portfolio
When it comes to investing, expensive doesn’t necessarily mean better. High-cost investments have to perform better just to cover their fees. Typically, costs are higher when funds are actively managed, however evidence shows the chances of them outperforming the market over the long term are extremely low2.
A smart investment solution should be low cost, meaning there’s more money left for you and your family. On a large portfolio of investments, the lower fees often generate savings of tens of thousands each year3.
2. An investment strategy to keep you on track
Most people understand, on a logical basis, that it’s best to buy something when it’s cheap and sell it when its price has gone up, making a profit in the process. Unfortunately, human nature means we’re inclined to do the opposite when it comes to investing.
A good financial planner will make investment recommendations that help you avoid this trap and develop a long-term strategy that is the fuel for your financial plan.
They’ll also ensure your portfolio doesn’t drift away from your intended objectives over time, “rebalancing” on a regular basis, taking profits, and reallocating according to what’s right for you.
3. Don’t try to time the markets
We all love to feel like we’re getting a good deal, which can mean we make decisions such as delaying investing, because we think the market will be cheaper next week, month, or year.
The reality is, no-one knows what investments are going to do next, and a decision to stay in cash or, even worse, sell your portfolio and move into cash, can have catastrophic consequences on your portfolio returns.
A financial planner will work with you to build a widely diversified portfolio, investing as much as you can afford, as soon as you can afford to – giving you the best long-term outcomes. They’ll also do the important job of keeping you focused on your priorities, rather than reacting when investing inevitably becomes a bit scary.
4. Increasing the amount of money you invest
A financial planner will work with you to design the retirement lifestyle you would like and build your lifetime cashflow to help you understand what you can do to achieve that.
Armed with this information, we typically find that clients have much more clarity around the money decisions they make, taking the steps necessary to achieve their desired outcomes.
The financial benefit of investing more and sooner compounds over time, allowing you and your family to enjoy the fruits of these good decisions.
5. Understanding the true risks of investing
The amount of risk you’re willing and able to take is a decision that will have a big impact on your investment returns.
Having an understanding of the investment markets and smart ways to invest to maximise your long-term returns will very likely mean you’re comfortable taking more risk than you anticipated.
A small increase in risk can result in a much bigger pot over the long term.
6. Generating income from your assets in retirement tax-efficiently
The higher the level of income you would like to enjoy in retirement, the greater the potential tax savings from having a well thought through long-term income strategy.
While living off your ISAs or cash savings until they’ve run down is an easy approach that we find many people adopt, it makes the chance of you paying more tax in the long term much higher.
7. Lifetime Allowance tax savings
It’s often assumed that if you’re close to or over the Lifetime Allowance, there’s very little you can do about it. This is not the case. There are a number of planning opportunities available that, if appropriate, can save significant amounts of Lifetime Allowance over the long term.
This is a complex area where it’s easy to make mistakes, so if this is something that impacts you it’s important to take advice from a firm that work regularly with clients in a similar situation.
8. Inheritance Tax planning
Making gifts during your lifetime is one of the most effective ways of reducing the Inheritance Tax your estate will incur.
A financial planner who is focused on what’s most important to you, will help you understand what’s possible with what you have. This alone can save your estate vast sums in the future, plus you get the chance to see your loved ones enjoy the benefits of your decisions.
9. Capital Gains Tax planning
Over time you would expect your invested assets to increase in value. If you have any that aren’t in an ISA or pension, they may be liable to Capital Gains Tax (CGT).
Based on current rules, you have an allowance of £12,300 each year before you incur CGT, yet many people let the gains accumulate year on year rather than use their available allowance.
This approach increases the chances of you having a Capital Gains Tax bill when you sell the assets. In contrast, a financial planner that “washes” the gains out on a regular basis using available allowances, will save you tax.
10. Saving Income Tax while building your wealth
There are a number of mainstream tax planning concepts that will reduce the amount of tax you are paying. Understanding what pension contribution allowances you can carry forward, or that there is a disproportionately high saving to be made once you earn £100,000, are just two examples.
By considering your entire financial position, in line with your priorities for your future, a thoughtful financial planner can identify all the available opportunities for you. They’ll gently challenge natural tendencies and misconceptions to ensure that you maximise your financial success, leaving more money in your pocket for you and your family to enjoy.
If you’d like to find out about how working with us can put more pounds in your pocket, please get in touch. Email us at your@lifemattersfp.flywheelstaging.com or call 01202 025481.
Please note, the value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
The content of this article is for information purposes only and does not amount to advice. Any decisions made regarding your finances need to take into account your unique circumstances and aspirations.
Sources:
1 Vanguard, ‘Putting a value on your value: Quantifying Vanguard Adviser’s Alpha in the UK’, June 2020.
2&3 David Blake, Tristan Caulfield, Christos Ioannidis and Ian Tonks (2015) ‘New Evidence on Mutual Fund Performance: A Comparison of Alternative Bootstrap Methods’.