What is a Financial Adviser?

Let’s say you are thinking about retiring in 25 years and you also want to be able to afford to send your children to university without them having to borrow excessive student loans.

To achieve these things, you may need the help of a financial adviser who is able to construct a financial plan allowing you to achieve your goals.

Working with a financial adviser you will be able to build a financial plan to cover a range of things including the types of investment accounts you need, the correct types of insurances you may need through to retirement planning and even estate and tax planning.

A financial adviser is also able to help you understand what will be involved in achieving your future goals. They are able to provide an education process on a range of financial areas which will allow you to better understand complex financial situations.

A particular area a financial adviser can assess is if you had assets in both the UK and abroad. Without the right advice and a financial plan, you may not benefit from the synergies that exist between the two jurisdictions, or you might make costly mistakes that could damage your long-term financial prospects.

Financial services, planning, and investing can often be tricky subjects. They are full of complicated jargon, and there are strict regulations that differ from one area of finance to another.

Do you need a financial adviser? Say you are looking to invest, buy a financial product, manage your money more effectively or simply plan for the longer term, financial advice can be a good investment. Whether you need financial advice will depend on a number of factors, such as the product or service you’re looking for, your goals, your own financial understanding and experience, the complexity of your needs and your personal circumstances. For example, if we look at pensions and investments i.e., Investment ISAs. These products are harder to understand than cash savings products, and it’s not always easy to work out exactly what to expect from them or how they work. By not getting advice, you might not be considering all of the options available to you. And you could risk buying a product that’s not suitable for you. So, you really need to do your homework. Ask yourself these questions: · Can you afford to lose any money? · Do you have the time to do the research? · Do you have much experience, knowledge or skills when it comes to investing? · If things go wrong, are you comfortable taking responsibility for any bad investing decisions? · Do you have the time and resources to review your finances regularly, to make sure everything is still on track? If the answer to any of these is ‘no’, then getting financial advice might be your best option. When trying to decide, also bear in mind the cost of fees against the financial and emotional cost of getting it wrong if you buy without advice. What services do financial advisers offer? Financial advisers can provide a wide range of products and services and help you with your financial circumstances at different stages of your life. Those products and services can include:

· savings and investments · pensions · life insurance · mortgages · equity release · tax and estate planning

· retirement planning

· family finances

What is the value of financial advice?

It is a good question. For example, there has always been a confusion between what a financial adviser does and what an accountant does for instance. Although both work in the same financial field, their jobs are very different, but they complement each other.

Most people understand the role of an accountant and how they add value but what exactly does a financial adviser do and how do they add value?

Defining the value of financial advice

A key part of working with a financial adviser is to avoid making costly mistakes. It’s less about picking the best investment and more about making smart decisions with all aspects of your money.

To try and provide some context, Vanguard commissioned an independent study to understand what is the value of working with a financial adviser.

The study found that clients with a financial adviser on average earned about 3% per year more than those without an adviser.

Other studies confirm these findings. For example, a study produced by the International Longevity Centre (ILC) with the support of Royal London, underlines this.

It revealed that UK adults who took professional financial advice between 2001 and 2006 enjoyed an average increase in the value of their assets by roughly £48,000 after 10 years, compared to those who took no advice.

How much does 3% per year add up to?

It might not seem a lot, but 3% per year over a longer period can really add up. Especially through something called ‘compounding’.

Let’s assume that you have £100,000 in investments. In an average year, these investments might grow by 5% per year. Over a period of 15 years, your investments would grow to £197,993.

If you work with a financial adviser and achieve the extra 3% per year, the same investment could grow to £293,719. Nearly £95,726!

These studies show that it isn’t about finding a better investment to generate an extra 3% per year. It’s about avoiding costly mistakes, like selling at the wrong time, taking too much risk or paying too much tax.

The moral of the story is that a good financial adviser should add significantly more value than it costs to work together.

3%

The benefits of working with a financial adviser

1. Creating the right Asset Allocation within your investment portfolio

Creating the right ‘mix’ of investments is the most important investment decision. How much should you invest in equities, bonds, cash and the like? Invest too cautiously and you won’t get the returns you need. Invest too aggressively and you’ll lose sleep at night. This is something called creating a ‘diversified investment strategy’.

A financial adviser will help you define your objectives for the investment. They will create a well thought out investment policy statement, identifying the right mix of investments for you. This ensures that you take the right level of risk and are best placed to achieve the returns you need.

2. Ensuring your Portfolio is rebalanced

To maintain the right mix of investments, you need to rebalance the portfolio every so often. The frequency will depend on a number of factors which could ever be personal or economically. This involves selling some of the investments and using the money to top up the others. Emotionally, this can be difficult to do, as we can become attached to certain investments.

A financial adviser will review the portfolio objectively and rebalance as required. This ensures that you maintain the right mix of investments and don’t take too much risk.

3. Cost Management

In most areas of life, you get what you pay for. If you pay more, you get more. But in the world of investing, you get what you don’t pay for. When you think about it, it makes sense. Costs matter, because every pound you pay in costs eats into your future returns.

A financial adviser can reduce your charges by providing access to institutional investments with lower costs. This ensures you keep more of any investment return.

4. Investor Coaching – Not being emotionally led

Investing can provoke strong emotions. When our investments fall by 20%, we panic. When our investments rise by 20%, we celebrate.

The problem is, we’re all human. We’re hard-wired to avoid pain and seek pleasure. So, we sell our investments when they fall, and we buy them when they rise.

A financial adviser will act as a voice of reason between you and an expensive mistake. They will provide sound, objective advice, helping you stick to the plan and remain invested.

5. Tax Management

Taxes can be a major drag on your investment returns. Selecting the right ‘tax wrapper’ is just as important as selecting the right investment strategy.

A financial adviser will help you work out which accounts are right for you based on your tax position. They will consider the tax rate you pay now and consider the tax implications when you come to withdraw the money.

6. Withdrawal Strategy

How you withdraw money from your investments can have a big impact on your overall return. Which account should you withdraw from? Which investments should you sell?

A financial adviser will create a withdrawal strategy for your investments. This ensures that withdrawals are as tax efficient as possible and that you maintain the right mix of investments.

7. Income Management

Your investments will produce income, such as dividends. Unless reinvested, this money will sit idle, producing no return. You may also need to withdraw some income from the portfolio.

A financial adviser will reinvest any income the portfolio provides. They will also determine which investments are sold when you need to withdraw money.