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Financial Advice – It’s not worth it, is it?

I often read personal money blogs and several of them have readers’ questions. Overwhelmingly one of the most frequently asked questions is around the value of financial advice. This was a recent one I saw:

“I’ve got a pension pot of £550,000 with the Pru. I’m changing my financial advisor and he’s recommending using Brewin Dolphin and AJ Bell. His charges are 0.5%. In total, including all fund charges, the annual charge is nearly £12,000, for an estimated growth of £15,000. My risk level is 5/10. Am I right to think that these charges are excessive? I’m looking at lower-cost SIPPs with Vanguard, Hargreaves, and AJ Bell and not having a financial advisor. Thoughts please?”
I thought it would be useful to do a deep dive into what good financial advice looks like and the value that it adds.

What is Financial Advice?

Let’s start by dispelling a common myth. Financial advice is not just investing your money, it’s not about promising you amazing, market-beating returns. Anyone who leads, with the value they add being around returns and growth, is not a good financial adviser. They don’t control the returns; the market does. If they had any real influence over them; if they could constantly offer marketing beating returns, they would be on a superyacht conducting business, not an office in Bristol. So if they can’t offer that, what can they offer?

Coaching

Don’t panic, we aren’t talking about yoghurt weaving and chanting. Coaching, in terms of financial advice, means the ability to help the clients understand what they want from life and how money fits into that. It’s about being able to ask some good questions, which really get the client thinking, being able to actively listen and put those thoughts and words into a meaningful action plan. This conversation will help us establish your objectives and goals and give us something tangible to work towards. This is the first stage of 4 Financial Planning’s process and happens during Stage 1.

Planning

Once we have your goals and objectives we need to make a plan. As an ex-sailor, I love a sailing analogy. Without a plan, having objectives is like setting off on a voyage with a destination in mind but no chart (map to you landlubbers). During Stage 2 we complete a financial X-ray; we take a forensic look at your income, expenditure and assets and how they can be used to reach your goals. This is a holistic look at your finances which cover the four critical areas of financial advice.

  1. Protection – What would happen if you were unable to work and earn an income? How long could you manage? What financial position would your loved ones be in, if you died prematurely etc?
  2. Short Term – Everyone should have some emergency savings, which are easily accessible, we would normally recommend three to six months’ expenditure.
  3. Investments – Investments are not the same as savings. They are for longer-term needs and for funds which you are going to need access to for at least five years and preferably more. The only slight anomaly to this rule is long-term income such as pension drawdown, where you are likely to be invested but accessing the funds regularly.
  4. Legacy Planning – What happens when you’re gone. Inheritance tax used to be something only the wealthy would pay but with property prices soaring, at a far greater rate than the nil rate band for inheritance tax, has, far more people are getting caught, and at 40%, it is worth planning.

Financial Advice

You might be thinking we have already been doing that in Stages 1 & 2, but you’d be wrong. Before we begin to give you financial advice and tell you what you should do with your money, we need to understand you and what you’re looking to achieve. Only then will we be in the position to think about putting your plan into action. I know from speaking to friends who are outside the industry, that apart from “Investing” what else does a financial advisor do. I’ve broadly under stage 3, but here is the definitive list (or I hope so):

  • Protection – This includes Income Protection Policies, Critical Illness Cover (they are different), Shareholder Protection, Life Assurance, Whole of Life, Term Assurance, Family Income Benefits.
  • Investments – Individual Savings Accounts (ISAs), Pensions, SIPPs, Commercial Property Investment Bonds both onshore and offshore, General Accounts, Open Ended Investment Companies (OEICs), Unit Trusts, Junior ISAs, Stocks and Shares.
  • Tax & Estate Planning – Trusts, Enterprise Investment Schemes (EISs), Venture Capital Trusts (VCTs).
  • Risk Profiling – Using psychometric testing and analysis.

Maintenance

Like any long voyage, the weather can change, and you need to be prepared. Ongoing financial advice is crucial as your circumstances change or become more complex e.g. you’re approaching retirement. A good financial advisor will meet with you once a year as a minimum, for your annual planning meeting. We will ensure your plan is still on track and if it’s not, work with you to get it back on course. We will advise you on tax planning opportunities each year, such as further pension contributions, ISAs or EIS. We will monitor your attitude to risk and yes, we will monitor your portfolio, ensure it is performing in line with the benchmark and make changes if necessary.

The Most Valuable Area of Financial Advice!

There doesn’t seem to be much left to cover does there. But we have missed the most valuable area of financial advice. I’d like to tell you a story: Back in 2015 a client called me worried about what she had read in the press that a market crash was imminent. I patiently explained why it was impossible to predict that, I told them that they had a decade before retirement and staying invested was the best course of action and that even if a crash occurred the markets would recover because they always do. Over two meetings I reiterated that, but they made the decision to move into cash; £330,000 pension portfolio into cash and this was towards the end of 2015. The market did fall a little, but then went on and grew and grew. Eventually I convinced them they couldn’t stay in cash forever and we moved back into the market. Had they stayed invested their portfolio would have been valued at £387,750. By not following my advice it cost them £57,750 and added two years to their retirement date, which leads us on to:

Behavioural Coach

The most valuable area of financial advice is when your advisor stops you doing something stupid. That might be trying to time the market, moving to cash, buying in the dip or investing in something too good to be true. Whatever the mistake you’re about to make, your financial advisor will tell you if you’re being an idiot.

So what is the financial benefit of taking financial advice?

In 2019 Royal London commissioned an independent study by the International Longevity Centre – UK (ILC) on the “Value of Financial Advice” and a further paper “It’s Worth Revisiting the Value Financial Advice” which drew some conclusions; those that took financial advice at the turn of the century were on average £47,000 better off than those who didn’t. The wealth uplift comprises of an additional £31,000 of pension income and £16,000 in non-pension additional wealth. Another key finding was that those people who were classed as “affluent” gained an additional 24% of wealth, those who were classed as “just getting by” benefited by an additional 35%. The explanation was that those “just getting by” who took financial advice were prepared to take more risk and got better returns than those who did not receive financial advice, it’s all about education!

4 Financial Planning – How we can help

Anyone who knows us will know that it’s our mission to make financial advice more accessible and not something which is the preserve of those “affluent” people. We use technology to streamline our processes and we focus on what’s important; you and your money. We don’t believe in percentage fees, which according to Paul Lewis are “a wealth tax”, and the first meeting doesn’t cost you anything, if you’d like to book a call with one of the team then please call on 0117 457 9945 or use this link to schedule a meeting.

Your capital is at risk. The value of your investment (and any income from them) 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. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

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