What is the Value of Financial Planning?

This content is for information purposes only. It should not be taken as financial advice or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult an independent financial adviser or financial planner such as ours here at Shorts in Sheffield and Chesterfield.

A study undertaken by Vanguard¹ suggests that using a financial adviser can add as much as 3% per annum to your investment returns. This concept is referred to as ‘Adviser Alpha,’ and breaks down some of the ways in which advice can offer real, tangible benefits.

The research paper covers important aspects of investment planning, such as asset allocation, the use of tax allowances and behavioural coaching.

But true financial planning goes a step further. Investment planning is certainly one aspect. But the main advantage of having a comprehensive plan is that it brings together the different parts of your financial picture so that they work seamlessly together.

So what is the value of financial planning and how can it benefit you?

Helping You Budget

A good financial plan will aim to balance your budget so that your costs are fully covered, and any surplus is put to good use.

The first step is to keep track of all the income coming into your household, for example:

• Salary
• Dividends
• Self-Employed Income
• Rental Income
• Pensions
• Benefits

Don’t forget to account for tax if this is not deducted at source.

You will then need to account for your expenditure, which can be a little more difficult.

Bills and essential costs should be totalled up first, as this will give you an idea of your basic living costs. Remember to include any costs paid annually, such as car insurance.

Variable expenses such as clothing and household repairs should come next. While these are still essential, you will have some discretion over the amount and the timing.

Discretionary and luxury spending are the final components. This is the area in which you may need to reduce spending at times.

If your income exceeds your expenditure, you can put the surplus to work by:

• Building up your emergency fund
• Paying off debt
• Topping up your pension
• Making regular investments

If you are spending more than you earn, you have a few options:

• Shop around to reduce your bills
• Cut back on discretionary spending
• Take on a part-time job or start a side business
• Work on your CV to seek a higher-paid job or even a promotion

Planning for Emergencies

A good financial plan makes sure that risks and contingencies are covered to the best of our ability. This can include:

• Maintaining an emergency fund to cover unexpected costs or periods out of work
• Taking out life cover to ensure loved ones are protected
• Insuring your income so that you can still meet your essential costs if you develop long-term health problems
• Arranging critical illness insurance to make things a little easier if you are diagnosed with a serious medical condition.

While we cannot prepare for every possible scenario, unforeseen events have the power to derail a financial plan. While you might not want to think about the worst happening, a good financial planner will help you to address these risks and move on to more positive matters.

Saving Tax

Many people start to consider financial planning because they want to save tax. This is looking at it backwards. Saving tax is an inevitable consequence of good planning, not the end goal in itself. For example:

• Using your ISA allowance each year can save on tax within your investments. The tax advantages can help to maximise long-term returns. This also helps to develop a discipline for investing regularly.
• Utilising your annual capital gains exemption can prevent large gains from rolling up and becoming taxable later on. Rather than trading the funds simply to use this exemption, a financial planner would aim to use your exemption by recommending trades that are beneficial in their own right, for example rebalancing the portfolio, withdrawing capital, or transferring funds into your ISA.
• Pensions are extremely efficient as you receive tax relief on your contributions and the fund grows free of tax. However, pensions are also excellent for retirement planning as they place the funds out of your reach until at least age 55, improving long-term growth prospects. Pensions can also be passed on to beneficiaries, making them an invaluable estate planning tool. But there are also tax consequences for over-funding your pension. A financial plan can help you balance the benefits and potential pitfalls.
• Making regular gifts or setting up trusts can reduce inheritance tax. They also allow you to see your family benefit from your help, while retaining a degree of control over how your money is used.

A financial plan will rarely recommend a tax strategy simply for its own sake, as this will not necessarily benefit you when taking your wider situation into account.

Investment Discipline

By linking your investment strategy with your financial plan, this helps to filter out some of the daily noise of the markets, allowing you to focus on what is important.

A financial plan can help with:

• Working out the returns you need to achieve to reach your goals.
• Establishing the amount of risk you need to take.
• Deciding how much to allocate to different asset classes.
• Rebalancing your portfolio regularly so that it doesn’t drift significantly from the agreed structure.
• Avoiding behaviour which is likely to be detrimental to your investment plan, for example acting on emotion or bias.
• Encouraging you to take a long-term view rather than worrying about every fluctuation or trying to time the market.
• Planning withdrawals well in advance so that you are less likely to dip into your investments during a downturn.
• Demonstrating the benefits of behavioural changes, for example, spending less and saving more.

An investment strategy without a financial plan can still produce strong returns. But when you fully understand what you are working towards, the whole process becomes more satisfying.

Reducing Costs

Costs are one of the few aspects of financial planning that we can predict with a degree of certainty.

If you invest £100,000 for 30 years, every 0.5% of additional costs will reduce your eventual fund value by around 13%. So if charges reduce your total average growth rate from 6% per year to 5.5%, this is equivalent to around £75,000.

Charges are an essential part of investing. These may include:

• Platform or custody charges
• Fund management charges
• Trading costs
• Adviser charges

All of these can add value to your investments. However it’s important to make sure you understand what you are paying for, and that you are receiving value for money.

A financial plan can help to establish exactly what you need, allowing your adviser to recommend the strategy that best suits you, cutting out any unnecessary costs.

Income Strategy

Financial planning can add even more value when you need to start taking an income from your investments. This may be as straightforward as ‘retirement,’ or it could be a complex process spanning many years and using several different asset types.

A financial plan will aim to:

• Ensure you withdraw lower-growth, less tax efficient assets first.
• Leave tax-advantaged plans in place for longer so they have time to grow and recover from any volatility.
• Build in a cash buffer so that your needs are covered and you don’t need to withdraw your investments early.
• Combine withdrawals from different asset types to ensure that you use any available tax allowances.
• Avoid triggering avoidable tax consequences, for example by drawing on a pension unnecessarily or exceeding annual withdrawals from a bond.

Peace of Mind

A more abstract benefit is that it allows you to delegate the mental load of your financial planning to an expert. You no longer need to be concerned with:

• Whether you are paying enough into your pension and are on track for retirement
• Whether you can achieve your goals
• Whether you are invested in the most suitable funds
• Deciphering the financial jargon and risk warnings that appear in your annual investment statements
• Keeping track of your investments for tax purposes

Keeping You on Track

Regular reviews are perhaps the most valuable part of financial planning, for example:

• It keeps your plan relevant and up to date, taking your circumstances into account.
• Any new tax legislation or planning opportunities can be built in.
• If your plans drift off-course, small adjustments can be made in plenty of time.
• You can be assured that your investments are performing as expected, or advised if any changes are needed.

A financial plan is not a product, it is a process. Ideally, when you find a financial planner you want to work with, this should be a lifelong relationship.

Invitation

If any of the subject matter in this article concerns your own financial plan, then our team would love the chance to have a conversation with you to see how we can help. Book a free call with a member of our team today, without obligation. We look forward to speaking with you.

Please note, advice on Tax and Trusts is not regulated by the Financial Conduct Authority

 
¹ https://www.vanguard.co.uk/documents/adv/literature/adviser-alpha-brief.pdf