5th December 2014
If you think financial advisers aren’t worth the money, think again; you could save three times the cost of advice.
While many investors are taking a DIY approach to their money, research by Vanguard Asset Management shows the savings made by bypassing financial advice may be a false economy as financial advisers can add up to 3% a year in value – returning up to three times the cost of their investment advice, which is typically 1% of the money invested, and all without picking the ‘right’ funds.
There are seven key investment advice areas where advisers can save you money
The amount of money you invest in various asset classes, such as equities, fixed income and cash, is probably the most important determinant of your future returns. Due to every person’s asset allocation being unique, Vanguard said it difficult to quantify how much value an adviser could add.
However, Scott Gallacher, chartered financial planner at Leicester-based adviser Rowley Turton, said asset allocation could be worth up to 4% a year although the value would vary depending on the assets a client wanted to invest in.
Before jumping into a fund, it is worth checking the costs and advisers can help you to invest in low-cost funds – saving you up to 0.92% a year compared to the average fund cost. This saving could be higher if you are currently invested in higher cost funds that aren’t delivering above average returns.
Gallacher said: ‘Even if you are using tracker funds, which are all supposed to be low cost, there is still a huge variation of the cost. For example, the Henderson UK tracker fund which aims to track the returns of the FTSE 100 index costs 1.2% a year, whereas there are three other similar FTSE 100 trackers costing less than 0.2% a year, a potential saving of over 1% a year.’
Rebalancing your portfolio means reviewing your asset allocation and making sure it is still geared towards the returns you want to achieve. Over time the risk in a portfolio increases over time if it is not rebalanced as the asset allocation ‘drifts’ into higher risk assets.
However, rather than accept the drift you would be better off accepting higher risk at the start and rebalance to ensure risk remains level – this boosts your returns by an average of 0.43, according to Vanguard.
Investing is emotional and advisers can help investors to maintain a clear head and keep their eye focused on the long-term. The amount of value that can be added here is large.
While most investors are aware they need to think long-term and maintain a disciplined approach – in other words not selling at the bottom and piling in at the top – it is easier said than done.
In this instance an adviser can act as a behavioural coach and save investors money by stopping them from abandoning a planned investment strategy – which can cost them dearly. Vanguard research found those who deviated from their retirement fund investment plan fell 1.5% short of their benchmark. This means an adviser could make a potential saving of 1.5%.
Advisers can help you to use up your tax allowances that you, and your spouse, may have – structuring your investments and savings in the most tax-efficient was possible.
Vanguard calculated that an adviser can add up to 0.23% of additional return in the first year through clever tax planning without increasing the risk to the portfolio.
Even when you’re spending you savings, an adviser can still save you money – essentially by utilising your tax allowances in reverse and spending money from taxable investments first, rather than tax-advantaged one.
The greatest gains to be had in this way are when taxable and tax-advantaged savings are broadly equal in size and the investor pays higher rate income tax at 40%. Vanguard calculated clever spending strategies can save investors 0.48%.
As interest rates sit at historic lows and income yields scrapping the barrel, there is significant value for retirees in taking advice. In today’s low rate world pensioners are unlikely to be able to live off the interest generated from their savings or the income from their portfolios.
The value that advisers can add by switching retirees from an income investing strategy to a total-return strategy – a combination of income and growth – is significant but unquantifiable.
Gallacher said financial advice should not be seen as a cost but an investment in your financial future.
‘I’ve recently started working for a new client and almost immediately we were able to identify fund, product and tax savings of around 1.65% a year – equivalent to £11,500 a year – which more than offsets the cost of our advice, and that before we even get started on the additional value from asset allocation or behavioural coaching,’ he said.