How much does no advice cost?
Many who consider taking financial advice are put off by the cost. But the same is true of those who do seek advice – they are put off by the cost of going it alone. So who is right? Let’s take a look at the bill for an unadvised life.
Remember when financial advice was free? No, neither do we. Genuine independent advice has never been free, although in the past some consumers may have thought they were receiving advice, when in fact they were simply being sold a product for which the ‘adviser’ (or rather salesperson) received a commission. Times have changed and advisers must now have transparent fees – but often these fees can put people off seeking advice, because it may take some time before the benefits are felt.
In principle it’s simple: you pay a certain sum up front (the adviser’s fee) on the premise that in the long term you will probably gain more money than you paid. And although exceptions can always be found, those who take advice have been shown to end up substantially better off than those who do not. In that sense, hiring an adviser is itself a kind of investment. But for many people the initial hurdle is whether they can justify that initial payment.
Consider this pair of friends. Jon and Dave are both well-educated and from affluent backgrounds, but Jon comes from a family that habitually seeks financial advice, while Dave likes to make his own decisions. We first meet them at university.
The journeys of Jon and Dave
Jon and Dave both start out in rented accommodation, but Jon’s father talks to his adviser and decides that buying a flat would be better long-term value. Jon’s father has to pay the deposit and guarantee the mortgage, but Jon ends up paying less per month than Dave, and when he graduates he has a share of a valuable asset when the flat is sold.
Both Dave and Jon get first jobs with good employer benefits, and both sign up to the pension scheme. But Jon talks to the family adviser and also joins the company share scheme. It costs him more in the short term, but after three years Jon cashes this in and puts it towards the deposit on his first proper home (Dave, meanwhile, is still renting).
Both Jon and Dave earn enough to be able to make investments. But while Dave considers the 1.5% annual fees on his investment funds to be reasonable, Jon again seeks whole-of-market financial advice and finds a fund charging only 0.5%. Over the years this adds up to thousands of pounds of difference between the two.
Jon also makes sure his pensions and investments are in actively managed funds, rather than the default medium-risk fund that Dave’s are put into. Although these fluctuate more, Jon can move them into safer investments as he gets older and more risk-averse. Again, Jon ends up thousands of pounds better off.
Dave (perhaps trying to even the score) spots what appears to be a golden investment opportunity with a hedge fund. Jon hears about it too, but his financial adviser looks into this particular hedge fund and finds things that cause him concern. Reluctantly, Jon sticks with his ‘boring’ stocks & shares ISA, but finds to his surprise that he still makes more than Dave when the hedge fund’s manager leaves and its performance slumps.
Eventually both men are approaching retirement. Dave tries to make do with just the government’s free guidance about his pension options, but they don’t tell him which would be best in his particular circumstances. In the end Dave opts for the traditional lump sum and annuity, because it’s the easiest option without an adviser. Jon, by contrast, started seeking advice some fifteen years before his planned retirement date, and has already taken steps to boost his pension (such as transferring other investments into it). Jon ends up with a substantially higher income in retirement, and also uses the new pension freedoms to ensure that any unused pension fund can pass to his beneficiaries on his death.
Counting the cost
So how much did Jon’s advice cost him over the years? That’s actually not the best question to ask. Rather, we should ask about the cost to Dave of not seeking advice. Dave ended up spending many hours of his time trying to decide what to do, and whenever he did make a decision he didn’t know if it was the best one, so he spent many more hours worrying about that. Dave’s choices were also less disciplined, based on what seemed a good idea at the time rather than on a considered plan, and they didn’t take proper account of his risk tolerance and how this changed over time. His strategy was simply ‘hope for the best’.
All forms of investment carry an element of chance, but it’s clear that Dave’s exposure to chance was far greater than Jon’s. But in the end, Dave’s decision not to take advice cost him more than the money he didn’t gain – it cost him peace of mind too.
Find out more about the value of advice here.