Price is what you pay. Value is what you get.– Warren Buffett
How do you put a value on advice?
DIY propositions, and journalists, put the value on reducing costs and the ability to outperform an advised proposition. This is an incredibly strong argument.
Consider going direct and buying a basket of investments, the cost could be 1.35% p.a. it could be less. If we take our proposition the cost of an ISA could be 1.69% p.a. (0.37% for the solution provider, 0.57% to the fund manager and 0.75% for advice). On this basis the DIY argument on cost is correct.
Looking at the second argument, a quick look at our site will show that we place an emphasis on delivery of goals through the investment of money and our aim to add value by outperforming the benchmark. We will allow you to judge the success of this.
However, the performance is only part of the package (albeit an important part); there are other parts of the package which are just as important. This is often missed and where as a package value is added.
Our website outlines our service proposition but below are some aspects of the proposition which we believe the average DIY investor will not do, and this is crucial to investing and consideration of cost:
One of the hardest things is not to follow the herd; we often get caught up in the rush. Bubbles draw us in because we want something that others have had, equally when crashes happen we rush to exit with no clear plan of what we are doing. Patient and careful investors will be rewarded because often they are contrarian and they don’t chase the quickest return i.e. they adopt a get rich slowly approach.
Our approach is to be the rational head when everyone else is irrational. We will look to ask questions that you don’t always ask yourself when doing your own investments. Examples of the types of questions are things like – do you have a will, are your children going to university and how will you fund this, what will you do if you lose your job, when do you plan to retire and if you have to go into a nursing home how will you fund this.
These are difficult questions and often ones we will not discuss when we do our own investments, if we can answer these types of questions we can then start to have a rational head because any decisions we make come back to what we are looking to do.
The key to good investing is having a plan. We often read about DIY investors and how they have made a fortune by going direct. Remember there are many DIY investors who have lost a fortune by doing it themselves. Often it is not about the return but what is the plan, and have you delivered on that.
This is really hard to do and many people never do this. The reason is that it takes time and it can hurt. If we look at the rational head, what is the plan if you lose your job? If you have no insurance to cover you then have you money to cover this? If you plan to retire at 65 is this part retirement or full retirement, have you considered how much you need and how to get this in the most tax efficient way.
Being somewhat controversial annuity rates are not poor they reflect a changing society and we need to reflect this in our retirement planning, do we do this when building our plans for retirement.
We work with clients to understand what their aspirations are and then look at how we can deliver on these but equally we know these plans can change, and therefore we have to be flexible.
The premise of doing it yourself is often focused on how your portfolio performs (as well as cost), take this example in 1999 one of the top performing US funds returned over 100% compared to some more average US funds returning around 15 – 20%.
If you didn’t know this, you would be happy with 15 – 20% but often rational thoughts disappear when you see returns of 100%. If you dig a little deeper before investing you will find that the fund which has outperformed carries additional risk and understanding that risk is important.
Having a plan is crucial but understanding how you are going to achieve that is also an important consideration. We spend a lot of time understanding how a fund operates and whether it can capture the opportunities we believe are there without putting additional additional risk into the investments.
We talk to clients about the risk they are comfortable with and build and blend the portfolios to match that risk. This is not a one stop shop, what a client is comfortable with today may not be the same tomorrow so we have to be flexible to adapt as the client’s needs change.
We meet a lot of fund managers; talking amongst other things about how they manage money and their concerns for the markets.
One thing that comes out of all the meetings is that there is always someting to worry about; over time managers have raised concerns of a tech bubble in 1999 (well a few did), there were concerns over debt in 2006/2007, and there are always political concerns. And there is no doubt many other things that can be added to the list.
I hate the term bull or bear market because what does it really mean! If you invest for the long term then the reality is that markets will be volatile, events happen. Well managed investments should go up, but it won’t be a straight upward curve.
When the markets wobble we stress to clients to hold their nerve because it is a wobble. In 2008/2009 and 2011 the markets suffered big falls but for many investors who had well managed portfolios they would have seen significant upside to their investments over a five to ten year period. The point being that if your philosophy and planning is right then a wobble shouldn’t worry you.
This is an important part of the job we do, we listen and effectively we are there to take the stress and worry away from the client.
There is a tendency via the regulators, journalists and individuals to be risk averse especially at retirement. We have argued for a long time that the world has changed. If we retire at 65 with £100,000 it is not about living five years, life expectancy is now 15 to 20 years. However, because we are at retirement we switch to a risk averse mind-set. This means we turn to cash and bonds for protection. However, we know that interest rates are not going up fast anytime soon and that we are paying a premium for yields on bonds. If we put inflation into the mix then this cannot be a good long term investment.
This is a just an example but we all have biases and these need to be challenged as to whether they help or hinder the deliverance of our goals. As financial planners we are not going to force a client to do anything they are uncomfortable with but we will challenge things and see if there is a better way to get the outcome they want.
In conclusion, you can go direct, and you can save money via this route and potentially you could outperform our portfolios but our fee goes a step further and the true value of our proposition is the peace of mind that we aim to deliver. It is about working together to deliver on your needs and goals.
We feel that a fee of up to 1% p.a. isn’t expensive when actually what you get could be worth a considerable amount more than what you pay.