Is Financial Planning Really Worth the Cost?
When it comes to a tangible good, it can be pretty easy to assess value. Your flat screen TV may give you hours of viewing pleasure with a brilliantly sharp picture and you know it’s been well worth the £500 you spent on it.
But when it comes to assessing the value of services, things get a little trickier to judge. Financial planning is a good case in point. We know that many clients we work with really value our services (check out our latest client feedback scores) but we know many people find it hard to accurately quantify the benefits our profession brings and so assess whether this represents good value for money or not.
This is a problem that financial services (think paid bank accounts or pension providers) as well as other services industries (think estate agents or solicitors) often struggle with. Just how can you demonstrate that your clients get more out of your services than they pay for them – that the really are getting value from what you do?
Within financial planning, this is tricky as no two individuals are in the same position and therefore the value that they get can vary significantly. What has always been lacking is some form of empirical, evidence driven assessment of the value of financial planning – until now. A recent survey by Vanguard has tried to change that by breaking down the benefits of financial planning and investment management and putting a monetary (or percentage of wealth) value on it.
Their research ‘Adviser’s Alpha: Putting a value on your value‘ suggests that financial planning can add up to 3.5% per year to a client’s overall wealth when compared to those who do not employ a planner. The really interesting part of this research is how this breaks down:
Investing is emotional and a financial planner 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 a planner can act as a behavioural coach and save investors money by stopping them from abandoning a planned investment strategy – which can cost them dearly.
(Potential value added: up to 1.50% per annum)
Low cost investments
Using low-cost investments can have a significant impact on long-term returns. The overwhelming evidence from academic studies shows that (particularly in the more developed markets), active management (paying a fund manager to run a fund) simply doesn’t add much value. By taking a predominantly passive approach to investing, you can cut the investment fees you pay significantly. Every pound saved in fund management fees is an extra pound in your portfolio.
(Potential value added: up to 0.92% per annum)
Regular portfolio rebalancing
Over time, different elements of an investment portfolio will grow at different rates. This portfolio ‘drift’ may mean you end up taking on risk that you had not planned to take and that could hurt your performance over time. Regularly rebalancing your portfolio will put you back on track, reducing risk and increasing long term performance.
(Potential value added: up to 0.43% per annum)
Smart spending strategy
When it comes to using the money you have invested, it’s important to spend smartly – using the proceeds from the right investment at the right time. This helps minimize the tax payable and increases the longevity of investment portfolios.
(Potential value added: up to 0.48% per annum)
Asset allocation strategy
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. Too often, investors’ portfolios are concentrated in just one or two asset types, leaving them exposed to downturns and unlikely to capture the full upside potential of the markets. Studies have shown that asset allocation is one of the key drivers to long term investment performance and is an excellent way to add value to an investment portfolio.
(Potential value added: up to 0.23% per annum)
Beyond these more quantifiable benefits of financial planning are many that are less so. We find that clients often value the certainty and security that having a financial plan brings. Many also love knowing they can chat to their financial planner whenever they like. Financial organisation and education are additional benefits most people with a planner enjoy – having their finances perfectly organised and with a good understanding of their current position and future needs.
For many people these things can be the difference between worrying about their money and sleeping soundly at night. Whether that’s worth 1% a year to you or many times that, these additional benefits should not be overlooked or underestimated.
This research and our own experience suggest that most people get a lot of value from financial planning and investment management. With most financial planning firms charging significantly less than 3.5% per annum, there should be significant benefits to be had from such services.
Given this research, it really is worth considering whether a financial planner could help you get more from your money and help you achieve your financial and lifetime goals.