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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?
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:
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:
If you are spending more than you earn, you have a few options:
A good financial plan makes sure that risks and contingencies are covered to the best of our ability. This can include:
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.
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:
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.
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:
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.
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:
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.
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:
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:
Regular reviews are perhaps the most valuable part of financial planning, for example:
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.
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