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The value of advice: part 3

This is the third in a series of articles where we explain how good financial planning and advice adds value.

Here at Clear Vision FP we are slightly obsessed with ensuring we add value to our clients affairs. However, I appreciate it isn’t always clear what value a good financial planner can add. In my view, there are six key areas that the added value falls under. These are…

  1. Setting and achieving goals;
  2. Investment management;
  3. Efficiencies – cost savings;
  4. Tax planning;
  5. Behavioural coaching;
  6. The ‘other’ stuff.

Today we will be focusing on efficiencies and how that can add value.

Efficiencies – cost savings

This is an often overlooked added value add that can make a big difference. The cost of various product wrappers, insurances and funds can vary widely. Lets start with funds…

The charges for fund management is something that is pretty popular in the press at the moment. If we filter the funds that fall into the UK All Companies sector, the ongoing costs for each fund ranges from nearly zero to 2.91% per annum. This is a massive difference. The higher charging fund has to generate a return of nearly 3% more than the lowest charging fund, just to match the performance! Not just that, but it has to do this EVERY SINGLE YEAR.

If we look at funds that cover all asset classes the picture is a similar one. An independent research company called Finalytiq conduct a study of multi asset strategies every year. This year’s study found that the average multi asset strategy has an ongoing charge of 0.96% per annum, but that there are instances of fees as high as 2.78% per annum. This is before adviser charges and platform/product fees are added!

To give you some context, the fund management charge for our multi-asset strategies ranges from 0.25% to 0.35% per annum. This is a saving of between 0.71% and 0.61% against the average cost. By lowering the cost of investing, our investment strategies have a lower hurdle to jump before making a profit.

This is something more relevant to old products, but can be relevant for today. The charges that product providers can vary both in the level and the way they are calculated. A lot of older contracts will charge between 1% and 1.5% per annum. The complication is that this will sometimes cover some (or all) of the fund charges.

As a comparison, let’s assume that the annual charge is 1% and there are no additional fund charges. If we combine a portfolio costing 0.35% with a platform that costs 0.30%, the total charge on a portfolio of ours (without an adviser fee) would be 0.65% per annum. This is a saving of 0.35% per annum. On a portfolio of £300,000, this would equate to a saving of £1,050 per annum.

In reality, the saving can be much greater. This means that you keep more of the returns your portfolio generates.

With insurances, it’s a comparison process with cost as only one of the components. Not only is there a big difference between the cheapest and most expensive, but there is also a big difference if commission is included or taken out (and a fee charged).

As an example, a 40 year old company director needs to take out £300,000 of life cover for 25 years. The cheapest premium is £15.78 per month, however, there are providers offering the cover for over £30 per month.

If we take it a step further and remove commission, the premium drops to £12.19 per month for the cheapest cover. This saves £1,077 over the term of the cover. So as long as the fee is lower than this, there is a cost saving.

Cost savings are often overlooked, but are something all advisers can achieve. Not only that, but they will often go a long way to adding value in a quantifiable and visible manner.

This is something we are attempting to clarify and quantify during annual planning meetings with our clients.