Recently I heard myself utter the words that “using a Financial Planning service would probably result in higher charges and lower returns” on a particular client’s pension investments.
Oh, I could sell coal to Newcastle, me!
Why pay more for less?
Don’t worry, I am aware that paying more and getting less won’t be at the top of anyone’s to-do list. Especially now, when we can’t move for news about eye-watering price rises in food and fuel (come to think of it, though, even I might get a decent price for some dirty coal at the moment – in Newcastle or anywhere for that matter). So, why would I say such a thing?
It can still make you better off
Truth is, despite the less-than-compelling numbers, a planning service on those terms can still make someone better off. Let’s imagine your teenage offspring, niece, nephew, friend of the family, dog, whatever came to you and said they’d been buying Bitcoin with their pocket money for the last 5 years and the value of it now was enough for them to buy that chateau in Provence that caught your eye in last week’s Sunday supplement. Great, you say. Sell the Bitcoin and I’ll grab my passport (stopping only to do a quick lateral flow on your way out of the door). “Ah. Well, no, actually,” comes the reply, “I can’t sell it at the moment. And anyway, I’m going to try to double it because, you know, why have one chateau when you could have two?”
A bird in the hand…
As the responsible adult in the room, how do you respond to that? Do you high-five the sheer gung-ho-ness of it all? Or do you put your sensible – boring – head on and start talking about numbers of birds in hands and bushes? Individual investors who have been in the right thing at the right time can – understandably – begin to feel that double-digit returns are normal. That every year will bring more of the same and that they can map out their future based on what has happened in the past. And some people do. Sometimes, the timing works. Hey, I sold a flat in 2003 for nearly three times what I bought it for six years previously. I got lucky.
Saving yourself from disastrous losses
But the majority of us can’t really afford to take Lady Luck for granted when it comes to the pot of money that we have been saving for retirement. Pension investing – or indeed any investing that is for a purpose beyond the thrill of seeing the numbers go up – is as much about saving yourself from disastrous losses as it is about seeking returns.
What if markets get the collywobbles?
Sure, the bigger the pot, the better. But if in seeking that big pot you risk losing the lot (accidental rhyme alert, there) you have to question your approach. Generally, excessive wins come from concentrating your money in a small number of investments (ideally, in the ‘winners’) – in other words putting all your eggs in one basket. What happens if, on the day you put your well-earned, gold-effect carriage clock on the mantelpiece, the markets get the collywobbles about a salmonella outbreak? Those eggs will come crashing down at precisely the wrong time for you. (I guess you could always sell your clock).
Being protected from catastrophe
Spreading your investments out (known as diversification in market-speak) is the boring, but sensible, thing to do. You might always have the feeling that you could have made more money elsewhere (and people who have, will delight in telling you so), but you will have been protected from the worst catastrophe. As Financial Planners, we are aware this ‘diversification message’ is dull and not always an easy ‘sell’, but it can be the one that adds the most value in the long term.
Diversification – it’s quite a business
Although it might sound simple to ‘spread your investments’ it’s not just a case of adding some plant-based burgers and peas to your basket because they happen to catch your eye. There’s a mind-blowing industry of professional investors out there pulling together spreadsheets and algorithms, holding meetings with management and visits to factories, building committees, networks and armies of analysts that attempt to get exactly the right weight, number, shape and size of eggs, burgers and what-have-you in the correct basket to suit people of different ages, with different circumstances and different ideas about what a good retirement looks like. And even they don’t get it completely right all of the time. It’s quite a business.
How can a financial adviser help?
One of the reasons why people come to a financial adviser for help with their planning is because they have got to the point when doing the investing for themselves has got a bit scary – either because the investments have stopped being amazing, or because they are approaching the time when they need to start taking the money out. If you have already been choosing investments for yourself – either within a Self Invested Personal Pension (SIPP) or in an ISA or other investment account – a chat with an adviser can be helpful to see if you are putting yourself at unreasonable risk. And, if so, whether they can recommend a portfolio of professionally managed investments that have a tighter control on that risk. Equally, for someone who has never invested, it can help to get over the hurdle if you can talk to someone who understands the value of such a dull way of doing things – even if they guide you to a lower cost, more suitable solution than they themselves provide.
Who will protect you if you mess up?
Taking the services of an adviser who is regulated by the FCA has the added benefit of protection from the Financial Ombudsman. This kicks in if you are given unsuitable advice (eg a portfolio of hair-brained ventures that won’t turn a penny of profit for at least a decade for your 94-year-old uncle who needs some readies to pay the carers, perhaps). The Ombudsman can order the adviser to compensate for losses caused by unsuitable advice. And then there’s the Financial Services Compensation Scheme in the wings in case that same adviser goes out of business in the meantime. Of course, if you mess up your own investments – to put it bluntly – there really isn’t anywhere for you to go.
Value in the mistakes that don’t get made
And that takes us to the point about fees. Yes, if you ask for a service, it is going to cost money. Some of the money that you pay goes in levies to those financial institutions that I’ve mentioned above – ‘free at the point of use’ has to be paid for somehow. And some of it pays for the work that goes into analysing what you’ve already got and – where appropriate – researching something more suitable and then doing to paperwork to put it all in place. For some people whose investments have not been performing as well as they could be, the fees will pay for themselves in better returns. For others, the fees will add to the ‘cost’, but the value will be in the mistakes that don’t get made.
First chat for free
If you’re reading this and everything you have for retirement is tied up in a workplace pension that is being managed for you, you might wonder if there is still any value in seeking advice. In short, there might be – particularly if you are starting to think about retiring and how you might want to take your pension out. Most advisers and planners will have that first chat for free to see if it is worth you pursuing the idea of taking advice.
And finally, a word about relationships. There was a study* done in 2019 that showed that individuals who took financial advice saw an average boost to their wealth of c.£48,000 over a decade. When I see claims like that, I tend to wonder about who the individuals are. It’s an obvious point, but if you are not comfortable with the idea of investing or seeking advice, you are not going to benefit from such a boost.
Dipping your toe in first
With my Talking Finances With Women hat on, I feel instinctively that this remains an area where advisers could do better. If you have never had financial advice – and never seen your Gran, Mum, Auntie or sisters do any such thing either – and you walk into an adviser’s office with little idea of what you are getting yourself into, immediate talk about forming a long-term relationship could just freak you out. Offering services that recognise that some people need to dip their big toe in the water before committing to a full-on, head-under plunge seems to me to be the way to go. As ever, I’d be interested to hear what you think.
Meanwhile, there’s a half a bag of firewood in the shed that I’m going to take door-to-door to see if anyone will swap it for a chateau in Provence. Wish me luck.
*Joint research from Royal London and the International Longevity Centre
Talking Finances is a trading name of Talking Finances Ltd. Talking Finances Ltd is an appointed representative of Beaufort Financial Planning Limited, Kingsgate, 62 High Street, Redhill, Surrey, RH1 1SH, which is authorised and regulated by the Financial Conduct Authority, FCA Registration No. 583233
This article represents the personal opinion of Carole Haswell only and does not represent any opinion of Beaufort Financial Planning Limited. Financial decisions should not be made on the basis of this article