A question that no doubt everyone that uses a financial planner has asked themselves at some point; a question that anybody that doesn’t use a financial planner has hopefully asked themselves, and answered, before deciding not to.
The number and range of tools available on the internet to help people looking to plan, invest and save has been increasing, and the range and cost of direct to consumer investment platforms has improved significantly over the last 20 years. There are tools to help you estimate your life expectancy, create and manage a budget, project returns, source investments and, if all else fails, there’s Google for the really tough questions. So if you can do it all yourself, what is the point of a financial planner?
Well the obvious answer to this is the same answer to the question what is the point of a conveyancer when you’re selling your house, an accountant when you’re submitting anything other than a simple tax return, or a plumber when you’re putting in a new bathroom – either you could do it but they’ll do it better and it’s less likely to go wrong, or you could do it and do it well but you haven’t really got the time or would prefer to spend it doing something more fun.
Do you want to spend your time learning all there is to know about Transitional Tax Free Amount Certificates or do you want to enjoy your weekend with your family? Are you confident that you understand the implications in the error in legislation around Scheme Specific Tax Free Cash when it comes to drawing money from your pension, or would it be better to talk to an expert?
This sort of benefit isn’t necessarily quantifiable. After the event it may be possible to quantify the cost of getting it wrong versus the cost of using a financial planner, but when the decision is being made it is often just the one side that can be seen clearly. It has very much an emotional value to it rather than a monetary value. Which is why we sometimes find ourselves spending the weekend searching for “the best DIY will” on the internet, or wishing that we had used masking tape rather than tried to cut corners.
Vanguard, a major global investment company, has spent quite a lot of time looking into what the value is of a financial planner to clients. Some of their conclusions are a pretty good starting point to look for answers, although they find themselves straying into the “difficult to quantify” area at times. They also acknowledge that it is unlikely that the added value will come through consistently and annually, which means that even where it may be quantifiable it won’t always be tangible.
Vanguard break the value add into seven categories :
Probably the most interesting thing to note is that it isn’t about “better” performance in the way that an investment company or fund manager might look to explain their worth. Yes, one would expect to produce a better outcome but that can come as much from reducing costs as it can from trying to outperform other firms or a selected index.
The impact of suitable asset allocation and total return v’s investing for income was something that, although they believe it is there, Vanguard failed to find any consistent value to. I also think that since this research was updated in 2020, the impact of cost effective implementation is probably less than it was then as the focus on cost reduction continues. So there are two groupings that I believe are worth looking at in a bit more detail.
Tax allowances and asset allocation, as Vanguard put it, and order of withdrawals to spend, are very similar in how a financial planner can add value.
Partly they involve linking objectives to planning in the best way, as for instance where the focus is partly on having enough to live on and partly on passing assets to the next generation. Partly they involve finding ways to use the different “tax wrappers” as efficiently as possible. For example when a pension comes to be drawn whether one draws the available tax free cash in one go or as part of an annual draw from the pension.
The other aspect is in looking for advantages in the tax treatment of different types of investment, income, gains and product rather than simply replicating a portfolio of funds in each and every product. For some the starting rate band for savings income can be very useful; dividend income is taxed less than interest generally; most of any growth in a pension will be eventually taxable on withdrawal. Selecting specific asset types and funds for specific products and specific individuals can definitely improve what clients get out of their pensions and investments.
The estimate by Vanguard of the impact of these two elements is between 0% and 1.85% net return.
Rebalancing and behavioural coaching both reflect the relationship that a financial planner has with their client and the benefits that can come from a relationship of trust and regular interaction.
If the only concern is maximising returns with no thought for volatility or risk then to be honest you’d put everything into a broad global equity index and capitalise on the inherent risk premium. Rebalancing is about minimising risk more than it is about improving returns however, for the same balance of funds in a portfolio, the returns of a rebalanced portfolio showed a marginally higher return but for a significantly lower volatility. The temptation when something is going well is to ride the wave and, when it isn’t, to jump out and move into what’s been doing well.
Scottish Mortgage Investment Trust springs to mind as a great example. Stormed ahead during Covid, only to then fall back almost to pre-Covid levels. I know people who held (because it’s done so well) and people who bought (because it’s done so well); the former ended up disappointed, the latter felt much worse. Remember, within a diversified portfolio there will always be something that isn’t doing well compared to everything else as well as something that is doing great. That simply shows that the diversification is working.
Rebalancing is part and parcel of the behavioural coaching aspect, much of which is about helping people to avoid making poor decisions such as selling when investments drop, and trying to avoid getting into that type of discussion by structuring the investments so that when the falls come they are within a tolerable range. The only certainty with investing is that at some point you will look at a value and it will be less than the last time you looked. The important thing is to try and structure the investments so that the logical You can still say “well I knew it was going to happen, and it has”, rather than the emotional You panicking and rushing to sell everything before things get worse.
Behavioural coaching, along with specifically rebalancing, is estimated by Vanguard to add between 1.50% and 1.98% net return to a client.
I’m obviously biased but from the research that Vanguard, and others such as Maymin and Fisher in the US, have produced the answer has to be yes, if the things that you value are the things where a financial planner can add value.
(Source of added value estimates Vanguard : Quantifying Vanguard Adviser’s Alpha in the UK 2020)
