What constitutes GOOD ADVICE?
Two interesting meetings recently have touched on similar points, and I felt that the answer was important enough to warrant a more detailed explanation on our website.
These conversations boiled down to the same two questions: What is advice? And is it worth paying for?
Both conversations were with new clients where the starting point was an investment portfolio. And in both cases the conversation moved onto the service that Kennedy Black Wealth Management delivers to its clients and the fees we charge.
Our service is a premium, face-to-face, bespoke, financial planning service that encompasses all elements of our clients’ affairs. We help clients define their goals and ambitions (to be developed further in future editions of this newsletter), understand where they are – often in the middle of a complicated mess – and help put a defined and, hopefully, disciplined plan in place to reach those goals. We ensure everything is structured tax-efficiently and we take care of a lot of the boring stuff – e.g. corresponding with pension companies.
The goals bit is often over-looked. However, in our view, talking about goals in an abstract sense is somewhat meaningless, so I’ll jump the gun and give you a quick sneak preview of the next couple of editions of this newsletter by suggesting two ‘goals’ that we like to use with clients. Often this is the first time they start thinking properly about why they get up in the morning:
- Financial independence – where work is optional and you can relax in the knowledge that your current lifestyle is affordable for the rest of your life without the fear of running out of money.
- A retirement of your making – involving spending time travelling or with friends and family, instead of stacking shelves at the local supermarket to pay the bills.
If you’re anything like our typical client, you’re probably nodding along to both of those points, thinking: “That sounds good.”
A good financial adviser can help you identify the goals that are important to you, address the various facets to your financial existence, make sense of everything and demonstrate what you need to do in order to get where you’d like to be.
While part of that process may involve the use of investments, in our experience, the investments form a very small part of what we do with and for clients.
To focus on just the investments essentially means all you think you are paying for is “fund picking.”
Financial advice is not, and should never be, solely about fund-picking. Whether you believe in the abilities of star fund managers or not (we don’t), anyone can pick funds. In fact, it turns out even monkeys can pick funds and be rather good at it (see the book “Monkey With A Pin” by Pete Comley).
A lot of companies will tell you they can pick funds. Some claim to do it cheaply (although we often find it is worth digging a bit deeper to understand exactly how much you will be paying and what for). And people often think they can do it themselves.
The point is, if you’re not getting independent and comprehensive advice with that, then you’re missing the bigger picture. You may not be properly optimising your tax position (e.g. forgetting about Inheritance Tax) nor understanding why you’re investing in the first place.
Perhaps the biggest endorsement for the value that financial advisers can bring comes courtesy of the biggest proponents of low-cost investing, Vanguard, the US passive fund manager. Vanguard has identified five key areas where advisers can add the most value, and even they, in all their parsimony, think good financial advisers are worth paying for. It is interesting to note that ‘picking funds’ isn’t on the list:
- Constructing a sensible, broadly diverse asset allocation model;
- Annual rebalancing;
- Reducing costs elsewhere – e.g. through access to institutional funds;
- Behavioural coaching;
- Effective use of tax wrappers and allowances;
- A sensible spending strategy;
- Focusing on ‘Total Return’ rather than ‘investing for income’ (something I rounded against in a edition 15 of our newsletter)
In total, Vanguard estimates that these benefits add up to a quantifiable 3% a year. Personally, I think the behavioural coaching element is worth considerably more than this in its own right. A recent academic study of DIY investors in Germany (Meyer, Schmoltzi et al, 2012) found that 91% of investors underperform the market, on average by 8.5% a year after fees. You might be smart, well- educated, and financially literate, giving you a good chance of being better than average, but frankly the average stinks.