Our money is important to us so, naturally, we want to take care of it and ensure it’s in the very best hands – moving many of us to ask the question why should I use a financial advisor?
Over the years I have met many investors that have a very negative view of the financial services industry and those that work within it. They may have read articles about advisors ripping off investors in the national media, may have experienced poor financial advice themselves in the past or just do not want to pay for advice, because they believe they can do the job just as well; they see no value in financial advice or simply do not know who to trust with their money. This is perfectly understandable, when our money is so important to us – which moves many to ask the question: why should I use a financial advisor?
I feel the same way with dentists. I find it very difficult to pay a large sum of money to a professional on a regular basis, who says “yes, everything is fine” year on year… until something happens. As there is nothing worse than toothache, I am then more than happy to pay a professional to fix it and make sure it never hurts again, regardless of cost.
We use experts in all walks of life; from Doctors, Dentists, Pilots, Builders, but many may choose to DIY when it comes to money.
Why should I use a financial advisor?
Money will determine the ability to fund your future lifestyle and what would the consequences be if you get it wrong? There may be a time in your life when it’s too late to do anything about it and you find yourself underfunded for the lifestyle you had always planned for.
So why do you invest? Is it not to maximise your returns on your money, within the risk parameters you are comfortable taking?
Worldwide, you have clever financial professionals all trying to compete against each other to grow the wealth of their clients’ funds and there are thousands of funds available to choose from. If you are not working in the financial industry, what access to information would you have that gives you an advantage over all these professional global market makers?
Many investors have been lucky with stock picking over the past decade and feel strongly that they do not need to pay for financial advice. I have lost count of the number of times I have been told “we are very happy with the returns we are making”. My answer is simply “compared to what”? When stock markets are rising like they have over the last decade, everyone has made money.
I often hear investors claiming that they can get the same results as professionals, by investing their money with platforms like Hargreaves Lansdown and not having to pay for advice.
When I asked what their investment strategy was, typically they say it was based on media, financial publications or friends’ recommendations. This has never been a good financial strategy and picking individual stocks or funds based on past performance has always been down to luck, so let me show you why.
Financial investment case study: Second Opinion Service
I met a husband and wife business owner in July 2019 who had always invested their own money and were very comfortable doing so. They had a substantial sum (in excess of £1 million) invested with Hargreaves Lansdown. They told me they studied the stock markets and were very comfortable with their fund selections and the returns they were getting on their money, and a lot of this wealth had been self-generated. However, they asked me for a portfolio review and wanted to take advantage of our complimentary ‘Second Opinion Service’.
These were my findings:
|Risk||My conclusion is that your combined portfolio is fully aligned with your current attitude to risk profile|
|Diversification||My conclusion is that your combined portfolio has a heavy UK bias and does not take advantage of global diversification. With Brexit ahead I would consider reducing your UK holdings and consider diversifying your investment in line with world market capitalisation. |
|Performance||My conclusion is that the performance of your portfolio has not performed satisfactory to the risk profile it adopts, and has lagged due to lack of diversification. |
|Cost||My conclusion… is that your fees are very well controlled. However, my recommendation is to take back control of your money, cut out the middle men and improve your long term future wealth potential by using the expertise of a professional.|
|Tax efficiency||My conclusion… is that you are invested in a tax efficient manner|
After we sent them our report, they decided to take their own advice and keep their current portfolio. They felt as our management fees were £743 more expensive per annum (albeit with advice) they concluded that they were in a financially better position using the DIY method that they had used over the past decade.
Sadly, they were stock picking which to me is gambling and in my opinion did not have an investment strategy that would work over the longer term. But as professionals we shook hands and went our separate ways with the promise to stay in contact. So what has the impact on their portfolios been, now the markets have fallen?
Mrs Investor had £522,637 when we met in July 2019. Her fund continued to lag in performance up until the Covid-19 market fall and is now valued at £408,110… a fall of £114,527 (22% drop).
Had she taken our advice, her fund value would have been £471,880… a fall of £50,757 (10% drop). She would have been £64,123 better off at this moment in time. She now has a smaller fund value to compound as the market begins to recover, which will take longer to get back to parity.
Both Mrs Investors and Goldsmith Invest portfolios were an Adventurous risk and both portfolios took advantage of low fees. However our approach, offered a diversified and global selection of stocks, which our research has suggested will provide the most financially efficient route to investing client monies over the longer term.
For those DIY investors that may be saying ‘this is such a short moment in time’… let me highlight the performance if Mrs Investor had invested a similar sum five years ago.
The global diversified approach has returned £722,650 and the DIY £565,010. That is a difference of £157,640 and yes financial advisor fees of £0.5% (£2,613 per annum) would have been taken, but the financial service industry fees to access our funds would have also been reduced.
Remember the additional overall cost of advice was only £743 per annum. A small price to pay for professional advice – and this really is the answer to the question Why should I use a financial advisor?
So, ask yourself, in this situation, which would you choose: a DIY or professional investment strategy?