Why Buy Advice, deciding to pay for financial advice is a big step.
It is normal to question yourself, especially as the results of this particular investment may not be apparent for years to come.
This page is for anyone going through that decision making process. We hope you find it helpful, and please do not hesitate to ask if you have any questions or would like to talk to us in more detail about the advice service we can provide.
Getting advice – The basics
Many of us can probably take some financial steps ourselves without the need for professional advice, and with just a little research online. For example, write a simple will, put some money aside each month into a work pension (your employer is obliged to enrol you into their work pension automatically these days) and pay off debts. However, as you start to accumulate assets and your situation potentially becomes more complex, it is natural to think about seeking advice. That might be to help with the financial implications of a specific situation, such as retirement, the sale of a company, divorce or the birth of a child. It might be to seek reassurance you are on the right track financially (and to make any necessary adjustments if you are not).
Understanding your needs
Whatever financial decisions you have to make, the first step towards making the right decisions for you is to establish a clear understanding of your financial needs. These might be obvious, for example, you have taken out a mortgage and need insurance to help your family pay it off should you die. They might be less obvious, for example, you have accumulated some money over time but do not know how much you need to retire. One of the most valuable things an adviser can do for you is to draw out a clearer vision of your financial future. They can help you understand what options you have around longer term issues, such as retirement, estate planning and looking after your family. If you have an obvious and immediate need, they can also help you to meet this, in the form of a financial product. Talking to your Prosperis adviser, you may find you have financial needs you have not yet considered. Your adviser’s professional experience can help tease these out and address them for you.
Tip – Unless you understand your needs, you will not know which direction to take and what your destination will be. It is impossible for you or an adviser to decide on the right solution for you without understanding your needs.
Setting your Financial Priorities
Once your financial needs are clear, the next step is to be clear on your priorities. Depending on the amount of disposal income and investable wealth you have, maybe you will be able to satisfy all of your financial needs. You might need to prioritise some over others. Your Prosperis adviser will use their expertise to help you work things through in this area, and develop a plan of action to suit your personal situation. Generally, the first thing you would normally look to do is ensure you and your family are protected in the event of misfortune, such as ill health or death.
Getting the right level of insurance cover might sound relatively simple. Many of us can go online and buy straightforward policies such as holiday or motor insurance with ease. However, where greater knowledge or technical expertise is required, your Prosperis adviser can add value. A good example is critical illness cover, which pays out a lump sum on diagnosis of a ‘critical’ (but not necessarily fatal) condition. Critical illness cover can be difficult to compare without expert knowledge as insurance companies use different lists of conditions as a basis for their cover. Your Prosperis adviser will be able to tell you if the reason one company might be offering cheaper cover is that it has a relatively narrow list of illnesses on which it pays out.
Income protection is another area where an adviser’s knowledge can help. This is a useful insurance, especially for the self-employed, providing financial cover if you are unable to earn because of injury, sickness or (if you are employed) redundancy. There are rules, though, which limit how much cover you can have based on your income. Without knowing what these are, you risk paying for a policy that does not pay out when you need it to. It is not just about choosing the best value insurers. You may also benefit from an adviser pulling together just the right combination of insurances to meet your particular needs.
Tip – Always ask whether your adviser is choosing from the whole of the market or if they are contractually obliged to use certain ones.
The Need to Invest in your Future
Beyond protection for you and your family, for many people the next priority is investing for their future and in particular for their retirement. The state pension provides a relatively modest income of £155.65 a week for anyone reaching state pension age now (if you qualify for the full payment). If you are not already very close to state pension age, relying on it to be there by the time you retire is probably unwise. Successive governments are gradually pushing back the state pension age. People are living longer, placing a financial burden on the state future governments need to address.
Some people are still lucky enough to have company defined benefit (final salary) pensions. These have historically paid out reasonable pension incomes to those who have accrued longer periods of service with their employer. An example is the NHS pension scheme. Final salary pensions are becoming increasingly rare amongst private employers though, and even if you have one, you may still not achieve the income you would like in retirement.
Outside these two types of pension, the onus is entirely on you as an individual to save and invest enough money for your income in retirement. Without a thorough understanding of when you want to retire, the life you want to live in retirement and the income you will need to fund it, it is impossible to know what action you need to take to achieve your goals. Therefore, this is another area in which you can benefit from the support of an adviser.
Even once you reach retirement, you still need to make wise decisions with your money. The options open to you for taking retirement income range from the simplicity but reduced flexibility and expense of buying an annuity, to staying invested and taking income as and when you need it, with the ongoing investment risk associated with this.
Tip – For more information about taking an income in retirement, ask to see our ‘Options in Retirement’ booklet which summarises these.
Someone could approach you and ask you to invest all of your savings in their new business venture. Most people would be uncomfortable with this. It is difficult to assess whether a new business will be successful with no track record and you would be ‘putting all your eggs in one basket’. It could make you very rich, but there is also a very good chance you will lose all of your money and what if you wanted to sell your investment?
If you invest in an established, publicly listed company, more information is available. You can examine its financial track record and, compared to a private company, it is far easier to sell the shares when you want to. Even better, by investing in multiple publicly listed companies you are less reliant on the performance of just one business. Your investments are diversified. You can diversify still more by spreading your investments across different types of industries and countries, reducing the risks you might be exposed to if there are problems in a particular geographical or business sector.
Establishing how much risk you are prepared to take with your money and understanding what risk really means to you, is critical to the investment decisions you make. Some of the risks we have already touched on are:
- Capital risk – Losing your capital (the amount you originally invested)
- Liquidity risk – Not being able to find a buyer when you want to sell
- Volatility risk – Share prices going up & down based on performance & other factors
- Concentration risk – Concentrating your investments in a single market
Your Prosperis adviser, perhaps working with other investment professionals, can help you to make sure your investment portfolio is set at an appropriate level of risk for your particular circumstances. That includes diversifying where your money is invested, so that a downturn in one particular market does not necessarily mean a downturn in all of your investments.
They will agree a solution for you that strikes the right balance between your financial needs and objectives and the amount of risk you are prepared to take in achieving them. Sometimes that means you will need to compromise and an adviser will be able to identify where that is the case and build it in to your plan. For example, you might need to take more risk, invest more money, or continue working a little longer to achieve your objectives. Equally, you might find you can take less investment risk than you had first thought.
With so much information available online, you might wonder if you can manage your own investments. If you are experienced, knowledgeable and confident, that might work for you but there are also some good reasons it might not be wise. We will come back to these later.
Tip – A good adviser will act as a coach to help you meet your goals, managing you and your investments through more turbulent times and advising you against making rash decisions.
You Need a Plan before you Need a Product
We have already established, when it comes to making good financial decisions, the most important thing to do is to get under the skin of your needs, goals and objectives.
Tip – A good adviser will not simply focus on a set of products or funds you might need
It might be concern around a pension or an investment which prompts you to contact an adviser in the first place. There are some very complicated products out there, with successive governments making constant adjustments to suit their political and economic agendas. For pensions, there have been hundreds of changes in the past decade alone, some minor, some major but the starting point for any advice should not be a product
An analysis of your income, expenditure, assets and liabilities will allow an adviser to create a financial strategy or plan for you – an assessment of what income you will need to generate to match your expenditure over the longer term. It is an important part of the service an adviser provides for you. It helps you make much more informed decisions on how much you need to invest, what investment risks you need to take, and even when you might be able to retire.
In some cases, you might not need a product, or the products you already have might be the right ones for the job. Where one or more is ultimately recommended by your adviser as part of implementing your strategy, it is likely to be from one of three basic groups:
- Insuring you against an event. Covering you & your family in the event of misfortune (e.g. life cover, critical Illness cover & income protection cover)
- Helping you save & invest for the future. Tax efficient vehicles (or ‘tax wrappers’) through which you can invest, often in underlying funds. They all have different tax advantages & disadvantages. The most common examples are pensions & ISAs.
- Providing you with an income when you retire
Stand-alone Products or an Investment Platform?
Although the starting point for any advice should not be a product, in the end relatively simple needs can often be met by stand-alone products such as a pension, ISA or life insurance. Where more active management of an investment portfolio is needed, you might want to consider using an investment platform.
A platform lets you buy and sell investments across your whole portfolio, including your pension, ISA and any investments you hold outside of a tax wrapper. It makes trading easier, as the services are online. You can often make changes to your whole portfolio at the same time, and you will have an aggregated view of your investments and their value, typically updated on a daily basis.
Comparing different platforms, and their costs, can be complicated. At the least you will need to have an idea of which tax wrappers you want to invest through, how much you want to invest and, potentially, how often you think you will want to trade. Although all platforms should offer an investment range covering the most commonly used funds by investors, some have a narrower investment range than others (some only offer funds for example, while others might also let you invest in individual stocks and shares).
When you use a Prosperis adviser, all of this work is taken care of. Your financial plan will set out your high level requirements, followed by a recommendation of the products and investment solution needed to achieve that plan, including whether an investment platform would be suitable for you and, if yes, which one.
Tip – As part of their ongoing service, your Prosperis adviser will also handle the practical side of implementing their recommendations for you, leaving you with little to do once the advice has been agreed.
Doing it yourself – The problems
So far, we have been focusing on the basics of investing and the ways an adviser can help you with these. Now it is time to turn things on their head and take a closer look at the reasons why, no matter how tempting it may seem, doing it yourself is not always the wisest choice.
We are hard-wired to make mistakes
Everyone knows if they buy something relatively cheaply and then sell when it has grown in value, there will be a profit. Growth. Successful investing. Easy. Who needs a financial adviser? If it really is that easy, why are we not all rich?
Hindsight is a wonderful thing. If you look at a past performance graph for a fund or asset over time, it is easy to see when the best moments to buy and sell would have been. If all you have is the price of a range of funds today, do you know which are going to go up, which are going to go down, and which will make the most money over the longer term?
Economic bubbles rely on investors getting it wrong. People see an asset increasing in value and want a share in that growth. In they go and the more who invest the higher the price of the asset goes (demand being greater than supply). This means still more people want to invest and on the upward cycle goes. Until someone, somewhere realises this asset is now over-priced and decides to take their profit. The whole thing begins to crash like a stone. Everyone piles out at just the wrong time. Bought high and sold low.
Why do investors continue to follow this path? Because we are hard-wired to do so. The instinct to follow the crowd goes back to the plains of the prehistoric world, when it gave us a hunting advantage and helped us protect our young from predators. This is just one example of how our psychology can actually hold us back from investing in a balanced way. There are many more, each proven by extensive research over the years.
How Psychology can hold us back
Not only can psychological factors like these lead to poor decision making on our part, financial businesses understand them and can manipulate them through their marketing and sales processes. For example, aggregator websites you might use to compare and choose financial products may focus on specific criteria, typically price, leading you to ignore other relevant details and encourage a quick purchase that may not be right for you.
From this, we begin to understand, in many circumstances, the most significant factor in failing to reach a financial objective is likely to be our own behaviour. By procrastinating and not saving for retirement, by impulsively buying funds at the top of the market and selling when they have fallen, or by focusing on the one particular criteria that a marketing department wants you to focus on.
Tip – A good financial adviser will keep a laser-like focus on meeting your financial goals, steering you away from situations like these, where the psychological factors described above might otherwise cause you to make poor decisions and veer off track.
Some other Practical Disadvantages
As a single consumer navigating the financial markets on your own – even if you do have the confidence, knowledge and experience to feel you can give it a go – compared to an advice business looking after hundreds, maybe thousands of clients, you are always going to be at a natural disadvantage on the practical side of things.
Investing in an Adviser – Why it’s worth it
Hopefully, by now you have a better understanding of some of the ways an adviser can help you, and the value they can add to managing your financial life, along with the challenges you may face if you try to ‘do it yourself’. In this final section, we summarise the key benefits you can expect from investing in a financial adviser. We also outline some of the reasons you can be confident in the service you will receive and, finally, the protection that is available to you in the unlikely event you do experience any problems.
Helping you get what you want out of life
Financial advice is often viewed as providing solutions to problems, or meeting specific needs. This is part of what it does, but it is also much more. An adviser offering a financial planning service looks beyond short-term problems and needs and looks at your situation more holistically. They will find out what you really want from life and about your hopes and ambitions for yourself and your family.
It is not just about organising your finances, but about identifying where you are, where you want to go and building a financial roadmap to help you get there. Ultimately, it is about helping you get what you want out of life.
Taking care of you & your family
Financial advice is most commonly talked about in the context of investments, but the reality is that your needs go a long way beyond that. Good advisers will not simply talk to you about the money you have to invest or the products you could invest in. Instead, your wider circumstances and needs will come into play, to ensure that every step you take fits in with the overall plan to get what you want out of life.
That means your adviser will consider tax, so you invest tax-effectively, do not miss opportunities to save money and do not risk unnecessary tax charges. Your family needs are part of it too, including inheritance tax and your family’s financial security, along with insurance, savings and later life issues such as long-term care and wills.
Saving you from yourself
Poor decisions are perhaps the biggest threat to successful long-term investing and we have already seen how human psychology means our decisions risk being driven by emotion rather than reason. Working with a third party professional can make a big difference here.
A financial adviser does not have the same emotional attachment to your investments. Their responsibility is to you, which means helping provide a clear vision of the future and a view of the bigger picture. In other words, keeping that laser like focus on your longer-term goals.
A good adviser will thoroughly understand your needs and objectives and how to meet them. There is a good chance they have been there before, know where the pitfalls are and recognise when emotions are getting in the way of good decision-making.
Your Prosperis Adviser is well qualified to help
Under rules set by industry regulator, the Financial Conduct Authority (FCA), all financial advisers must be qualified to at least ‘Level 4’. That is broadly equivalent to the first year of a degree and covers topics including personal tax, pensions and retirement planning and investment principles and risk. There are also Masters and PhD equivalents above that, and specific qualifications for areas such as mortgages, pension transfers and equity release.
Tip – If you are meeting a financial adviser for the first time, it is always worth asking about the qualifications they have and what they mean.
You Agree the fees you pay upfront
Your adviser will agree their fees with you upfront, and the services that will be covered for that. This is good business practice, so that you understand the cost of both the initial and ongoing advice that your adviser will give you. It is also something that the FCA requires advisers to do. You can usually agree for the fees to be taken out of your investments if you wish, rather than paid separately.
Investment providers no longer pay advisers commission, so you do not need to worry they may be influenced by this.
You have access to protection if things go wrong
If you ever feel that your adviser gave you wrong or misleading advice, you can usually make a complaint to the Financial Ombudsman Service, at no cost to you. All advisers have to hold minimum levels of professional indemnity insurance, to cover complaints. If your adviser firm is no longer around or able to meet a claim you may be able to access compensation from the Financial Services Compensation Scheme. You can find out more about this scheme and how much you could be covered for at www.fscs.org.uk
Tip – If you use an unregulated adviser, these protections will not be available. They will often approach you through unsolicited telephone calls or mailshots. You should not take financial advice from anyone without first checking they are authorised and regulated by the Financial Conduct Authority. You can do this by checking the Financial Services Register at www.fca.org.uk
Remember, if it sounds too good to be true, then it almost certainly is.