How much value does a financial planner really add?
Vanguard’s Adviser Alpha survey is an annual report produced by one of the world’s largest and most respected fund management companies. Their latest survey used real-world data to try and quantify the benefits of using a financial adviser or planner – the returns on top of your returns, if you will. It makes for interesting reading.
The report discusses seven key areas where a planner can add value to your portfolio. Where they could, Vanguard quantified this value in ‘basis points’ by comparing the performance of real portfolios of people working with a financial adviser with those who did not. One basis point is worth 0.01% extra to your portfolio.
1. Asset Allocation
Definition: putting the individual components of your investment portfolio together in an appropriate way based on your risk tolerance profile.
Essentially, this involves making sure that your investments are highly diversified across industries and countries, and that you have the correct proportion of fixed interest elements in your portfolio compared to market exposure.
Value added: Vanguard couldn’t quantify this point, but highlighted it as one of the largest benefits a planner can provide. They stated that individual investors will not typically be able to allocate in the same way as a planner.
Definition: keeping your portfolio’s asset allocation correctly proportioned.
A portfolio includes both stock market and fixed interest (bonds) components. Let’s say that the ratio is 50/50 when you first invest; the stock market portion will typically grow faster than the bond portion, so if you leave it then the ratio will change over time, perhaps to as much as 70/30.
This increases your risk, as more of your money is now in the markets than you had planned, and if the markets retract you will lose more value in your portfolio than you anticipated.
Rebalancing is the process of keeping the ratios at the right level, by selling the gains if you’re ahead, or buying more stocks if you’re behind. It typically happens when the imbalance is 20%, i.e. has moved to 60/40.
Value added: 43 basis points (0.43%)
3. Cost-efficient Implementation
Definition: planners have access to what are called ‘institutional grade funds’, which are not usually available to individual investors and carry lower fees.
Institutional grade funds are cheaper to operate, meaning you see greater returns. In effect, you’re accessing bulk buying power: planners are allocating millions of pounds (or more) across many different investors, and therefore get access to institutional funds. Fees add up when investing, and this added value each year makes a difference.
Value added: 66-92 basis points (0.66-0.92%)
4. Behavioural Coaching
Definition: the psychology around finance. How do you behave when it comes to your money?
This has the biggest value of all elements discussed in the survey. A planner focuses on helping you achieve your goals, not just in the short-term but over time and consistently.
That’s why most planners advise meeting annually, so they can keep you on track and help you avoid making bad decisions based on news headlines or other factors. Sometimes the decisions planners make are designed to protect you from yourself!
Value added: 150 basis points (1.5%)
5. Tax Planning & Allowances
Definition: making sure you utilise what’s available to you.
If you’re doing something day in day out, you’re generally going to be better at it than someone who doesn’t. I don’t do my own tax returns, because others are better at them than I am and know things that I don’t.
Planners understand tax allowances and benefits implicitly and should be able to help you make savings thanks to that knowledge.
Value added: 23 basis points (0.23%)
6. Spending Strategy
Definition: we invest so that we have an income available in the future. A proper strategy covers how much you can safely withdraw without diminishing your capital, where to take your income from, what to do if the market falls, and much more.
Managing an income derived from assets and investments to make sure the money doesn’t run out is not second nature to most people. If you take too much money out, your future income is reduced and can drop below the levels you need. A planner will also help you withdraw in the most tax-efficient way.
Value added: 48 basis points (0.48%)
7. Total Return vs Income Return
Definition: ensuring investments are focused on the overall returns, not only on the returns offered by share dividends.
It’s easy for individuals to think they should concentrate their investments on shares that pay dividends, thinking of it as a source of income. But research shows that overall returns are greater when focused on a growth portfolio, not on this kind of income portfolio where the underlying share prices may not be growing at anywhere near the same rate, and the long-term returns are therefore lower.
Value added: unquantified
The total value added by using a financial planner instead of going it alone, at the lower end of Vanguard’s research, is 3% annually.
That might not sound like a lot, but in the financial world it’s huge. Getting 3% additional return each year on your investments over a 20-year period gives you over 80% more in your portfolio! Would you rather have a £100,000 portfolio or one worth £180,000?
The power of compound growth magnifies that seemingly small 3% over time. Using a planner isn’t for everyone, but if you need a sounding board or comprehensive professional advice, then the numbers stack up in their favour.
Who should use a planner?
If you’ve got challenges, sizeable assets or complex financial affairs, seeing a planner is a good idea. That’s also true if you’re looking at estate planning and helping out your children or others in your will (or before).
If you’re just looking at putting some money into an ISA or similar, then a CFP is probably not appropriate.
There isn’t a minimum amount of assets you need, because a planner goes way beyond simply how to invest your money. Along with topics such as different portfolios and pensions, they’ll discuss things like banking strategies, estate planning, life assurance, tax allowances… even pocket money for your kids!
A good Certified Financial Planner will ask disturbing questions, ones that take you out of your comfort zone. One of my first questions is always, ‘How do you want to spend the rest of your life?’ It’s about setting the right goals, then putting the strategies in place to achieve them.