THIS IS A self-help book. We wanted to keep it simple and concise. Of course, there’s plenty more reading you could do, but we’ve told you pretty much everything you really need to know about investing and the steps towards achieving financial freedom.
Something you might be wondering is, now we’ve shown you the ropes, whether you need a financial adviser.
The simple answer, for many people, is no. The priority for young investors is simply to get started. You also need to develop good habits, to control your spending and to invest what you can every month in a low-cost index fund. You don’t really need an adviser for any of those things.
There are several online investment providers to choose from that will get you up and running and give you the option to automate your contributions. Research the options carefully. You’re looking for a solution that’s transparent and inexpensive, and which primarily uses passive funds.
Increasingly, the new “robo-adviser” investment providers offer access to a real-life financial adviser, usually via video conferencing. For those who prefer to speak to a fellow human being when making important decisions (and that, let’s face it, is most of us) this hybrid approach is an excellent option.
What we would say, though, is that there comes a point in life when most people would benefit from having a financial adviser – someone who understands them and knows their financial situation in detail, and whom they can turn to whenever they need to.
Research by Vanguard has shown that a good adviser can add about 3% to your net investment returns every year. Over the course of your investing lifetime, that can add up to a substantial sum.
How does a financial adviser add this value? It’s not, as many people seem to think, through special insight into the financial markets or the prospects for the global economy. Advisers have no more idea than you do about where the markets are headed in the short to medium term.
Nor do they know which are the best shares, funds, countries or asset classes to invest in at any particular time, although many advisers like to give the impression they do. The evidence shows, overwhelmingly, that no one can predict the market with any consistency. You don’t want to pay thousands of pounds a year for a fortune teller. You can buy a crystal ball on Amazon for less than a tenner.
No, an adviser adds value by setting a suitable asset allocation, keeping control of your costs and, most of all, through behavioural coaching. As we’ve explained, it’s best for young investors if markets fall when they’re starting out. That way they’re buying shares at a lower price. But as your portfolio grows, it can become harder to hold your nerve in turbulent markets. An adviser can help you keep a level head.
By persuading their clients not to bail out of equities during a correction, or not to go all-in when markets seem to be heading inexorably higher, advisers can easily repay their fees several times over.
If you don’t want to pay for an adviser, we would certainly encourage you to identify someone to act as a sounding board. It may be a friend or family member, but it needs to be someone you can trust. You’re not asking them to offer advice, but simply to listen to your rationale for any big financial decision you make. Rather than someone who will simply reaffirm your thinking, choose someone who is likely to challenge you, to ask you questions and to point out something you may have overlooked.
Another important point to remember is that helping to improve investment outcomes is just one of the services a financial adviser provides. The best firms are able to help you with anything to do with your finances, or at least point you towards someone else who can. That might be choosing the right mortgage or an appropriate level of insurance; it might be tax planning or passing on your wealth to the next generation.
In our view, though, there is something that definitely is worth paying for at some stage, and that’s holistic financial planning, or financial life planning as it’s sometimes called.
Some advisers focus entirely on money. But money is only a means to an end, and without wanting to sound overly philosophical, the end is to live a life of contentment and fulfilment. A holistic financial planner can help you to connect money with meaning – to use your money in a way that reflects your goals and values.
Strange as it may seem, many people don’t give serious thought to what they really want. They go through life without even knowing what their goals and values actually are. In many cases, they’ve held self-limiting beliefs from childhood about the things that really matter to them and the role that money plays in their lives. Having a financial planner who can challenge those beliefs is extremely valuable.
We’re assuming that most people who read this book are attracted to the idea of financial freedom. But financial freedom means different things to different people. Sooner or later you’re going to need to decide what it is you want to do with that freedom, so that, at the end of your life, you don’t have any regrets.
Again, it might be there’s a friend or relative you can trust to help you work this out, to help you write a one-page plan and periodically check, in the years ahead, that you’re continuing to stick to it. But, one day, we would certainly encourage you to consider hiring a holistic financial planner on an ongoing basis.
A final word on finding an adviser. The right adviser is well worth paying for. But a poor adviser can do more harm than good. Do your research carefully and ask the right questions. Here are some examples:
Do you have an evidence-based investment philosophy?
Do you understand the value of behavioural coaching?
Do you offer cashflow modelling so I can see for myself that I can afford the lifestyle I want?
Do you provide proper, holistic financial planning or just advice on investments?
Another important consideration, as you would expect, is cost. Most advisers in the UK charge a percentage of the client’s investible assets. That tends to work to benefit those with smaller portfolios, but as your wealth grows it can work out very expensive. So, it’s worth considering a firm with a fixed-fee model instead, or one that charges by the hour.
Ultimately, choosing the right adviser all boils down to trust. Ask yourself, can I really trust this person? Can I be sure that they genuinely have my very best interests at heart?
Trust is, of course, a very personal and subjective issue. Only you can make that call. But, if you get it right, it might turn out to be one of the best decisions you will ever make.