In the world of investing, we all should consider a few things before picking where to park our hard-earned money. Questions about how much volatility you can stomach, how long you will invest, and the purpose behind the investment are common, but if you’re like most investors, some attention is given to performance. And so it should be!
But is past performance the best indicator of future performance? Based on research and experience, our vote is a big NO!
A Major Player in Fund Performance
It’s easy to be drawn to high performing funds. Who doesn’t want an impressive rate of return – which may or may not come with some bragging rights? Despite the appeal of double-digit earnings, a handful of studies show that past performance isn’t a real indicator of future reward. In fact, the biggest predictor of a fund’s performance is cost.
Every fund has a built-in cost of doing business, known as the expense ratio. Portfolio managers are paid to create and maintain a bundle of various investments within a single fund, making it easy for you as the investor to participate in a well-rounded, diversified investment. The expense ratio pays for that convenience by reducing your total return.
A recent study by Morningstar, the leading global research provider on investments, broke down the importance of costs when it comes to picking your investments. The data reveals that across all asset classes, the least expensive funds outperformed more costly options each and every time.
Staying in Control
So how do you make sure you stay in control of your investment portfolio’s overall cost and total performance? Start with your investment style. Active funds, or those which chase returns in an attempt to outperform the market, have higher costs than their passive counterparts. Despite the appeal in terms of performance, research shows that active funds do not consistently provide higher returns over time (that’s before and especially after costs!).
That’s because chasing performance is less about skill and more about uncontrollable luck.
Passive investments – those which track an index in an attempt to reflect the performance of a specific market – have far lower fees, leading to less drag on your total return. Investment managers who follow a passive management style don’t get caught up trying to beat the market, but instead, they focus on creating consistency and simplicity in their investment choices.
At Jones Hill, we understand that to reach your goals you need investments that perform well over time. Instead of focusing on the hype of outperformance, we help you construct investment portfolios that are low-cost, tax-efficient, and in line with your tolerance for risk – all which allow you to enjoy your life without wasting time chasing unicorn returns.
Contact us today for a discussion about your investment objectives and how we can lend a helping hand.
Financial advisers, are they worth it? It’s a challenging question for any professional, so here’s the how to guide to know if a financial adviser is right for you.
Free Financial Guidance
The Internet can tell you a lot about investment and retirement planning, and best of all it won’t charge you a thing!
Prefer a bit of human contact? Then get in touch with Pension Wise. Although strictly speaking they’re not advisers, they can provide you with some guidance and point you in the right direction free of charge.
Financial Adviser Charges
The other option is to get real financial advice. But be warned, the old days of ‘free’ financial advice are over. Nowadays fees must be expressed clearly and fairly. There are a number of different pricing models, but these essentially boil down to three main categories:
1. Hourly - typically around £200 per hour
2. Fixed fee – a flat fee which typically depends on the time, complexity and value of the
work involved
3. Percentage of assets under investment – typically around 4% of your assets
Cards on the table – at Jones Hill we offer fixed flat fees. We always disclose the fees you will pay (in a format you can understand!) and explain our charges fully before undertaking any work on your behalf. We prefer fixed fees as they give you the peace of mind by knowing exactly what you will pay and it means that you are not being penalised simply for having more money (as percentages do).
So how do the numbers stack up for a typical client who invests £150,000?
1. Hourly – a full financial plan is likely to take around 15 hours, so will set you back around
£3,000.
2. Fixed fee – typically range from £750 - £2,500
3. Percentage of assets under investment – around £4,500
Financial Adviser Value
Those are some pretty big numbers, so the real question is will a financial adviser improve returns enough to cover their own fees (and then some)?
In most instances, the answer is yes. A number of studies have shown that advisers help clients to reduce the ‘behaviour gap’, often to the tune of 1 – 2% per year. An adviser is more likely than you are to be able to see the big picture and take the long term view (remember Brexit?). They will be also able to improve your tax position and save you £££’s in otherwise paid tax.
But there are other sources of adviser value that are just as real but won’t necessarily show up in your bank account. You might call this lifestyle value.
Consider the time, knowledge and inclination required for self-managing your own investment and retirement plans. If you’re the type of person who doesn’t find reading personal finance particularly interesting, or has more exciting things to do with your life, then you likely would benefit from having a financial adviser. By being able to hand off your financial affairs to a professional, qualified expert you will gain the time and peace of mind to do the things you enjoy most.
The bottom line is this, financial advisers aren’t right for everyone. For many people, a bit of Internet research, topped up by a visit to Pension Wise is likely to be just fine. But if you’re financial affairs are complex and you value spending the time on the things you enjoy, then you will likely to benefit from having a financial adviser.
Remember, money comes and goes, time only goes.
It’s all over the media – press, radio, TV, Facebook & Twitter - Brad Pitt and Angelina Jolie are to divorce! The questions many are asking are “who cheated?” and “with whom?” but more practical considerations arise.
When there’s a split, how do you disentangle your financial and lifestyle plans from those of your partner?
Sometimes life serves you lemons …
The typical Jones Hill client may not have the finances and lifestyle of Brad & Angelina (possibly a rash assumption on our part!), but they’d be wise to involve a financial adviser in the separation negotiations. In the absence of a pre-nuptial agreement (Apparently Brad & Angelina didn’t have one, so you’re in good company!) you would be foolhardy not to take specialist advice before agreeing on the terms of a split.
It’s true that a financial adviser will add to the costs of the separation, but the arguments for consulting a financial adviser regarding a divorce are similar to the arguments for consulting one at all – please also see our blog post “Are financial advisers worth it?”
In a separation there may be investments, pensions, property (eg a family home, holiday home) and financial liabilities (eg a mortgage) to be split. Pensions can be split on value (for younger clients) or on income (for more mature clients). It may be prudent to balance a pension against other assets to avoid having to cash-in and start afresh (offsetting) or it may be possible to have a portion of a pension paid to another party (earmarking) rather than start new separate pensions (splitting).
Market conditions or other reasons may make it undesirable to sell property, and in that case, a balance will have to be achieved using other assets. The division of mortgage liabilities will likewise need careful consideration according to the age, employment situation and other liabilities of the parties.
The tax efficiency of any financial arrangements should not be overlooked. Whilst gifts between married couples or civil partners are tax-free, the transfer of assets may give rise to Capital Gains Tax liabilities, and the post-split tax situation of the parties may be very different from each other.
Whether you’re married, in a civil partnership or co-habiting, if separation is on the cards, don’t forget to contact your financial adviser as well as your divorce lawyer.
PS – Brad/Angelina – remember, if you’re calling Jones Hill from outside the UK, add +44 in front of our telephone number!
OK Brad, we can understand that if Angelina has just announced she’s divorcing you, then making lemonade won’t be high on your list of priorities.
Nothing feels better than accomplishing a goal you’ve set for yourself. Maybe you’ve been burning the midnight oil at the office and finally got that big promotion, or maybe you’ve put in countless hours of sweat into a home renovation. Regardless of your objective, seeing the end result is a beautiful thing.
It’s no different with goals related to your money, but for some reason, for a lot of people financial objectives seem a bit more challenging.
Goals that Work – and Ones that Don’t
Would you set off on a cross-country road trip without some idea of where you were headed or when you wanted to arrive? Most of us would avoid that disaster by having some sort of plan in place. Your financial goals should follow the same thought process: what do I want and when do I want it? In other words, they should be SMART: specific, measurable, achievable, relevant, and trackable.
You can work hard and set aside a few pounds here and there, but without setting specific goals, you are likely to feel a bit lost. Setting objectives for your financial life starts with understanding the specific “thing” you’re aiming for and then defining what success means in the context of that objective.
For example, your objective of wanting to retire by age 60 with enough assets to draw 75% of current income is a specific, measurable goal that you can track periodically. Simply stating you want to retire one day is lofty at best and sets no parameters for measuring your progress. Knowing where you want to go is great, but if you have little to no idea where you’re starting from, you’re in trouble!
Action is Everything
Your ’retire by age 60, drawing 75% of your current income’ objective only works when you figure out what’s needed to get there. To frame your goal, you will need to ask intelligent questions, such as:
- How much do you need to save now in order to reach the right account balance?
- Which investment vehicles do you need to set up to save in a tax efficient way?
Answer these questions and you’ll be on your way to sketching an actionable financial plan.
But if you’ve struggled with major financial goals, you’re not alone. Working toward something as far off as retirement, buying a second property or funding your children’s education can be overwhelming to think about, let alone plan for. These goals seem too big and too distant, but breaking down your financial goals into smaller, manageable chunks can help.
Let’s go back to our retirement goal – start with the big picture. If your lifestyle in retirement involves expensive hobbies, you’ll probably need more than someone who plans to just potter ‘round the garden.
Focus on understanding the big number first, and then break that down into smaller pieces that fit into your everyday life right now. Establish milestones for yourself that are realistic (i.e. savings X amount by the end of next year) so you don’t set yourself up for missing the mark.
Accountability Along the Way
If you’re like most people, setting a goal is not where the problem lies. Of course, you want to retire, or buy a beach home, or send the kids off to school without the burden of tuition – these goals are not uncommon. Unfortunately, reaching them without too many hiccups is. If you are struggling with reaching financial objectives, it’s time to get SMART about what you want.
Being accountable to another person who understands what you are trying to achieve is a powerful step in actually reaching your goals. At Jones Hill we know what it takes to get to the next level of your plan, and we bring a perspective that is both unbiased and proactive. We will boost your level of understanding about different methods to achieve your goals, leading to an ongoing relationship that helps you build, achieve and maintain your best financial life.
Unlike “the answer to life, the universe and everything” in the Hitchhiker’s Guide to the Galaxy, this question has no simple answer. However, just as a journey of a thousand miles starts with but a single step, here are three questions that will help to get your relationship with your adviser off on a sound footing.
1. What’s my investment philosophy?
There are several investment ‘styles’. To some extent the styles available will depend on your own and your adviser’s investment philosophy. This is why it’s important to choose an adviser who is sympathetic to your needs and objectives and doesn’t try and shoehorn you into something you don’t understand.
At Jones Hill, we see it as our job to work with you to achieve outstanding outcomes. An important aspect is whether you want to limit investments to companies trying to achieve certain moral or ethical standards, for example by specifically excluding companies that invest in tobacco or weapons.
Whatever you decide, flexibility is key so that if events – whether market or personal – take an unexpected turn, you are not stuck with an unsuitable plan.
2. What’s my risk profile?
Before making a single investment your adviser needs to assess your attitude to risk. In a nutshell, the higher the risk, potentially (not always!) the better the return, but also the greater the risk of failure. How much risk can you stand without it keeping you awake at night?
Well, younger people can generally afford to be a little more adventurous as they have longer to recover from any market setbacks. But for those of us who are a little older, we may want to settle for something a bit safer, which provides more stable and predictable returns. Boring as this may sound, it can be an effective strategy.
No conversation about risk is complete without mentioning Diversification, the golden goose of finance! In essence, diversification means not having all your eggs in one basket, whether that be stocks, bonds or property.
The reason being that sometimes one asset class is hot and sometimes it’s not, but it’s unlikely that all asset classes (property, bonds or equities) will all be swinging the same way at any one time.
3. When can I retire?
The £64,000 question! Why? Because it might be today, in 5 years or 25 years. The problem is, if you don’t know, then you’ll likely just keep plodding on aimlessly when you could have hung your boots up years ago.
The most significant factor in investments is time. The longer you save, the more your “retirement pot” is likely to contain. Whilst this may seem like a statement of the bleeding obvious, the fact is that most people leave it too late to start serious saving. Get ahead of the curve by knowing where you’re heading and when you need to be there.
In summary, make sure that you prepare for your first meeting with your adviser by thinking through the questions and topics you want to discuss, it will enrich the conversation and allow you to discuss the things that are most important to you.
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