21/06/18Financial advice price and value

Financial advice price and value

How do you put a price on the ability to retire early? Or being able to sleep well at night because you have no concerns about your money?

It can sometimes be difficult to place a value on a professional service, especially when the results might not be apparent for many years to come.

There’s been some debate in our profession this week following the Sunday Times report (https://www.thetimes.co.uk/edition/money/is-your-financial-adviser-charging-you-too-much-psbr3k70z) of new research by adviser comparison service VouchedFor which examined the cost of financial advice.

The study found a wide range of possible charges. Financial advisers were charging anything from 0.5% to 5% of investments initially and then between 0% and 2% a year for ongoing services.

There’s clearly a cost associated with financial advice. Because there is no such thing as a free lunch, anyone thinking about working with an adviser who is offering a service for ‘free’ or very low cost should treat such an offer with a healthy degree of suspicion.

Where some financial advisers take this approach, it’s often to lure in consumers using something called ‘contingent charging’, where adviser fees are charged if a product recommendation, such as a pension transfer, is made.

But for advisers who charge clearly disclosed fees for what they do, what should you expect and how can you place a value on the cost of that advice?

Any conversation about price should really be a conversation about value. Price can only be judged as ‘cheap’, ‘reasonable’ or ‘expensive’ in the context of what you get in return for that.

It’s the responsibility of the financial adviser to position his or her fees not only as an explicit monetary amount (which is a regulatory requirement) but also alongside a description of what they will be doing for you in return.

People tend to work with a financial adviser for one of three main reasons, and occasionally a combination of all three. Financial advice is taken because people lack the time to manage their own financial affairs, don’t have sufficient knowledge to make decisions based on technically complex factors, or simply aren’t all that interested in money matters.

All three reasons are entirely valid. We would encourage our clients to take as much interest as possible in their personal finances, but recognise that pensions and investments are not everyone’s cup of tea! This particular personal finance nerd might find these things fascinating, which doesn’t mean you necessarily should.

Quantifying the monetary value of financial advice is something that will vary between individuals. I know that I’ve been able to offer significantly greater value to some clients than other, by virtue of their financial circumstances.

There was some interesting research carried out by investment provider Vanguard a few years ago, which attempted to quantify the value added by a good financial adviser. They identified seven components of what they badged ‘Adviser Alpha’.

These components were asset allocation, rebalancing, lowering costs, behavioural coaching, tax allowances, spending strategies, and total return versus income. In each of these seven areas, good financial advisers have the ability to add real value for money.

For example, ‘behavioural coaching’ can help investors avoid the costly mistakes of giving in to fear and greed during periods of market volatility. Rebalancing, which is about keeping a portfolio’s risk and return profile on track, is another key area where financial advice adds real value.

In the US, Vanguard quantified the cumulative value added through these seven key components at around 3% a year. Compared with the typical fees charged by a financial adviser, even at the higher end of the price range, I would suggest this represents excellent value for money.

Another study by think tank ICL-UK and insurer Royal London found that individuals in receipt of financial advice are better off to the tune of £41,099 in investments and pension wealth, when compared to people who don’t take financial advice.

Now this might be a case of confusing correlation and causation, as those who seek financial advice are likely to be relatively better off in the first place, but it adds more weight to the argument that financial advice adds value above and beyond its cost.

If the cost of financial advice is something that has been putting you off speaking to a financial adviser, I would be very happy to talk to you about our fees and the value of these as they apply to your individual circumstances.

I don’t charge for a first meeting as this is all about us getting to know each other. I aim to have a long-term relationship with all my clients, it’s therefore vital that we not only get on, but will work well with one another and provide value for many years to come.

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