As someone who has interchangeably used a financial adviser and a DIY investment service, I have some understanding of both solutions and wanted to share the similarities and differences. Essentially, DIY investing is at one end of the spectrum and having an adviser is at the other.
Financial advice v DIY platform
A financial adviser will conduct a full fact-find in order to have a full understanding of you and your family, your financial situation (good and bad), your goals in life, your income – in fact everything there is to know about you and what you’re prepared to tell them about. This process, called Know Your client (KYC) is critical in the process of an adviser delivering a solution to your financial aims.
A DIY investment platform is none of the above. It will put at your disposal many of the tools that an adviser has, but you have to make the decisions – buying & selling – on an ongoing basis, to keep your investments growing. Using a DIY investment service is undoubtedly cheaper than using a financial adviser, but think of it this way. Building a new extension on your house yourself is a lot cheaper than hiring an architect and builders to do it, but would you? If you’re good with your hands you might consider it, but do you know planning laws, building regulations, how to make the roof watertight and install windows? For almost all people, this kind of extreme DIY would be too difficult to contemplate and best left to the experts, where there’s some accountability if anything didn’t work properly.
Many people know and understand their limits when it comes to money and investing. This is particularly true for long-term investing like your retirement which can be difficult, time-consuming and fraught with technical challenges that usually bamboozle even the most enthusiastic amateur investors.
Why pay a premium for advice?
So, what makes a financial adviser worth the premium over a DIY investment service? First off, the mere act of starting to invest is incredibly difficult. There are thousands of individual company shares, thousands of funds, bonds, investment trusts and exchange traded funds all vying for your attention. It’s all well and good knowing that building a diversified portfolio is what you should do, but what does that actually mean?
And the funds that are performing well today, might not perform consistently well tomorrow and beyond, so not only do you have to pick a winning set of investments today, but trade out the duff ones and buy into promising new ones on an ongoing basis. If this really doesn’t sound like you, or your thing, then there are alternatives.
Some DIY platforms have ready-made portfolios that you buy into and are managed for you. It’s up to you which one you buy and when you sell it but there’s some expertise going on to help you. This expertise tends to cost more than the funds and shares you might choose yourself, but the life-lesson here is you get what you pay for.
Unless you’re interested in researching shares or funds that are performing well or exploit a theme you understand (environmental shares and funds are really popular right now), then you’re unlikely to make a big success of investing your own money. Choosing investments that aren’t performing well might cost you something like 5% of the growth of a well selected pool of investments, so an additional 1% paid to a financial adviser makes little difference if they’re doing their job properly.
When I was younger and knew little about investing, I hired a financial adviser to build me a portfolio, set up a pension, sort out a mortgage (twice) and I’m sure various other money-related issues I came across and passed onto them, because that’s what they were for. Just as I wouldn’t bone up on law or do my own company accounts. An adviser is a professional to which you assign your money matters to, because in all likelihood they’ll do a better job than an enthusiastic amateur and pay for themselves in improved investment returns.
Going it alone is complicated
When my financial adviser retired, I knew a lot more about investing (being in the business now) and chose to move all my investments and pensions into one place and manage it all myself. Looking back on the last 20 years, I’ve made a lot of mistakes and have singularly failed to sell my poor investments and buy into new and better ones. There just never seems a good time to sell out and buy in again. The other big problem is that I’m accountable only to myself, so I can only blame myself, lack of time spent and a less than full understanding of picking sensible investments.
On top of all of this, I am getting nearer to retirement and this is where things get really complicated. I will cover retirement in another article, but suffice to say that any mistakes made here can be hugely costly, strip years from the period your retirement pot might last, or drastically reduce your income in retirement.
“The value of advice is not only having someone who understands the complexities of investment products, tax and financial regulation. It’s also about having someone who is able to see the bigger picture, to listen to your individual dreams and aspirations and help you make better decisions. Having peace of mind is often worth any cost”, says Tony Clark, Senior Propositions Manager at St. James’s Place.
So, if you are put off the cost of hiring a financial adviser, think again. Particularly if you are starting out or approaching retirement. The value they offer at these key life stages is almost certainly worth the premium you pay over a DIY investment service.
This article was sponsored by St. James’s Place.
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