Everybody wants to make sure that the purchases we make and the services we use provide us with good value for money; however, how do we put a value on services? Especially if that service relates to something as confusing as pensions and investments.
There have been a number of studies on the ‘value of advice’, one of which by Vanguard Asset Management* states
THAT THE POTENTIAL ADDED VALUE OF ADVICE ADDS UP TO ABOUT A 3%** RETURN.
This is the difference between the return that an investor might achieve on their own and what they might achieve with the help of an adviser.
So how is this achieved? Well, Vanguard split it into several components:
- Setting a suitable asset allocation
Assets perform differently and the trend over a longer term is for equities to outperform bonds. However, you would not want to be solely invested in equities, especially over the shorter term where they are more affected by market movements. Instead, a strategic asset allocation approach should be adopted using different asset classes (equities, fixed interest, property, cash etc), so that your portfolio meets your individual objectives. The right asset allocation for your circumstances can only really come from a detailed conversation about your financial situation, attitude to risk, capacity for loss, spending levels and time horizon, and factoring in other issues such as ethical considerations.
- Regular rebalancing
As stated above, the trend is for equities to outperform bonds over the longer term, which increases the equity weighting over time. As equities are riskier than bonds, the risk profile of the investment increases. Rebalancing is the process of resetting the plan back to its original allocation, controlling the risk and keeping the investment within a risk profile you are comfortable with.
- Minimising costs
Charges impact the returns of a portfolio; simply put, performance needs to be in excess of any charges in order to make a positive return/growth – the higher the charges, the better the investment needs to perform. Advisers have access to a wide range of low-cost funds and products, and with the benefit of pooling with other investors, can have the influence to achieve further discounts.
- Making the most of tax allowances
The benefits of investing tax efficiently compound over time. Generally, each person has access to certain reliefs and allowances each year, a prime example being your annual ISA allowance, which if unused can be lost. An adviser will keep you informed of these allowances and encourage you to utilise them where possible; therefore, those who receive advice tend to have more of their investments in tax-free or tax efficient investments, and not paying unnecessary tax.
- Spending strategy
It is not just your accumulation strategy which needs to be as tax efficient as possible; when you come to want to draw upon your benefits, there can be many different options available to you, with different tax consequences. You may wish to draw from a taxable source initially, to make use of your Income Tax allowances; however, when the income requirement exceeds this, a split strategy may be required to minimise tax payable.
- Total-return versus income investing
In the past, a portfolio could be setup for growth whilst still generating a healthy income; however, when bond yeilds are low this becomes more difficult. Extending the concept of asset allocation, when an income is needed, a portfolio may often need to adjust for this income generation, whilst often balancing the need to maintain the core capital value.
- And the largest value: Behavioural coaching
When the markets are going up, most people are happy to remain invested; however, in periods of uncertainty, a natural reaction is to want to remove yourself. This can sometimes be exactly the wrong course of action and discussing your concerns with an adviser can help you keep a level head and remind you of the original plan.
*Vanguard white paper entitled ‘Quantifying Advisers Alpha July 2022.
**This is an approximation and the actual value added may vary significantly, depending on client circumstances.
The value of your investment can go down as well as up and you may not get back the full amount invested.
The Financial Conduct Authority does not regulate taxation advice.