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Why a financial planner could make you £1000s richer every year

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Why a financial planner could make you £1000s richer every year

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3 minute read

There are some things in life you can’t put a value on. Health, family, and friendship are priceless.

Thanks to a study by Vanguard, however, you can calculate the value of financial advice. ‘Adviser’s Alpha’, their report, found that those who worked with financial planners could expect to see their portfolios increase by an average 3% per annum.

If you have a £1,000,000 portfolio, working with a financial planner could make you £30,000 a year better off. When multiplied over 20 or 40 years, the difference is significant.

Financial planners can generate value in a variety of ways.

1. A financial planner ensures you have the right asset allocation.

The way your money is split between assets can affect your portfolio returns.

Investing in company shares gives your money the freedom to benefit from stock-market growth. The price of shares can go up and down, which makes them a riskier investment than cash.

Cash presents fewer risks than shares, but savings interest rates usually don’t keep pace with inflation. Your money could lose its purchasing power over time.

When you decide how to invest, you need to consider how assets behave. Look at your goals, financial situation, and investing time frame. A financial planner will make sure you have the right asset allocation.

2. A financial adviser will rebalance your portfolio.

Once your asset allocation has been set, the job doesn’t stop there. One asset may perform very differently from another. Over time, your asset allocation will become skewed. Company shares should outperform bonds over the long term. Performance imbalance between your assets will eventually leave you with a riskier portfolio.

You can rebalance your portfolio by selling assets that are performing well and buying assets that aren’t doing as well. This might be counter-intuitive, but it will ensure your portfolio continues to reflect your risk tolerance.

A financial planner will monitor and rebalance your portfolio so it’s suitable for your financial goals.

3. A financial planner can look for cost-effective investments.

The more you pay in investment charges, the lower your potential returns. Charges have a significant effect over time, so it pays to invest in low-cost funds from day one.

Candid Money’s fund-charges calculator is a useful tool. Consider a £1,000,000 investment returning 7% a year, over 25 years. Reducing annual charges from 2% to 1% gives you an extra £905,547.

In fact, charges are the single biggest element in determining your net returns. A good financial planner might invest your money in low-cost funds. Doing so means that more of your money goes towards what you want.

4. A financial planner can guide you through turbulent times.

Trying to stay calm in turbulent markets is challenging. Panic decisions can prove costly.

Making well-timed investment decisions is no easy matter. Dramatic recoveries follow market falls on a frequent basis. So, you could miss out on strong gains if you sell your company shares.

If, at the beginning of 1989, you had invested £1,000 in the FTSE 250 and left the investment alone for the next 30 years, it might have been worth £26,831 by the end of 2019. (Bear in mind, of course, past performance is no guarantee of future returns.)

On the other hand, if you had simply missed the 30 best days of that index, the figure might have fallen by £19,288, to a mere £7,543 (unadjusted for inflation or charges). This highlights the importance of timing.

A financial planner can act as your coach. They will explain the importance of ignoring your emotions when stock markets turn volatile. This ensures panic decisions don’t destroy your wealth.

5. A financial planner will help you avoid paying too much tax.

There are lots of tax reliefs and allowances when you’re investing. For the 2020/21 tax year, they include:

  • ISAs – you can invest £20,000 in 2020/21 and shelter your money from Income Tax, Dividend Tax and Capital Gains Tax
  • Pensions – each time you pay into a pension you’ll receive 20% tax relief. Higher-rate and additional-rate taxpayers can claim an extra 20% and 25%
  • Capital Gains Tax allowance – you can realise profits of £12,300 in 2020/21 without paying Capital Gains Tax
  • Dividend Allowance – you can receive dividends of £2,000 in 2020/21 without paying Dividend Tax.

A financial planner will structure your investments in the most tax-efficient way possible. So, more of your money goes towards your future.

6. A financial planner will aim to enhance your retirement income.

The amount of tax you pay in retirement is impacted by the way you withdraw your income.

By drawing money from your taxable investments first, you’ll increase the proportion of money sheltered from tax. Your remaining portfolio should grow, because less of it is taxed.

Once you’ve exhausted your taxable investments, you can withdraw 25% of your pension tax-free. Subsequent withdrawals are taxed at your Income Tax rate. It may be tax-efficient to withdraw money from ISAs first. Withdrawals from an ISA are exempt from tax, whenever you make them.

In short, a financial planner can reduce your tax burden in retirement, by helping you devise a more efficient income structure.

Peace of mind is priceless.

Whether you’re early in your investment journey, preparing for retirement, or in retirement, getting financial advice can add real value. As we’ve seen, Vanguard has calculated this value at 3%. On the other hand, the peace of mind you get from knowing your assets are well managed is really beyond a price.

At Capital, we can help you create a solid financial plan, make sure you’re not paying too much in fees and taxes, and guide you through challenging times. Please visit our website or contact us at hello@capital.co.uk for more information.

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