2020 has provided lots of time, and food, for thought. Even during the festive season, the forced suspension of traditions is giving us all a chance to re-evaluate what we truly value. I suspect many attitude adjustments will stick.
The year has been one of unprecedented value destruction in lives and livelihoods, yet it has also been an opportunity for the proving of worth as individuals, organisations and governments have all been put to the test.
In a wealth management sense, this meant firms reacting agilely to the market maelstrom and then proactively positioning to leverage the investment opportunities crises always bring. It was also about communicating effectively with investors to give them the confidence and comfort they needed to hold firm to a plan during this wildest of rides.
Many wealth managers did exceptionally well in protecting and growing their clients’ capital. However, it is vital not to overlook the value of the investment discipline the professionals promote in a broader sense.
A rush for the exits
It is thought that half a million Britons sold £100,000 or more of their holdings during the peak of the March panic (and nearly 1.4m ran for the exits at the £10,000 level). Tragically, a third of such investors then never reinvested any of this money back into the markets and have had to watch on the sidelines as they’ve subsequently risen phoenix-like to record highs. The impact on their financial plans from failing to sit tight will be immense.
We all know that buying high and selling low is the very opposite of what you need to be doing, but paradoxically it is easy for such a move to feel “right” when it seems like the only way is further down. Thus, paper losses all too often become real ones, all in the name of wanting to do something, anything.
It is thought that emotional decision-making costs investors 3% or more a year in foregone returns. That is a really impactful number and unfortunately no one can regard themselves immune since research shows that investors are prey to all kinds of behavioural biases. Privileging evidence proving what we already believe (confirmation bias) is just the start of a very long list.
Steering investors away from self-defeating behaviours and helping them stick to a strategy is a huge part of the value an adviser delivers. Add in the financial planning piece, and all the tax implications that concerns, and the very real monetary value of professional guidance becomes even more impressive: recent research has shown that taking advice leads to a £47,000 increase in retirement income on average – and likely very much higher for more substantial pots.
Trust but verify
Taken in these terms, advisory fees may start to look like very good value. Your task is to make sure they actually are though – and remain so. Trust but verify, as the saying goes.
Most investors will understand how powerfully small savings in fees, or gains in returns, compound over time. But while wealth management is certainly a numbers game, it is also one of quite nuanced value judgements and looking under the bonnet on those numbers too.
First, you naturally need to know if a manager compares favourably to the peer group in terms of headline returns. Equally important is understanding what your returns are net of fees. Genuine outperformance may justify paying more, as long as you really are sure that’s the case.
A higher-than-average Total Expense Ratio for running your money might also be down to more intangible things. Here again, you need to be clear-eyed. Which elements of service and brand mean enough for you to pay for, and how much if so? Which parts of the “white glove” service could you potentially do without? Of course, where a provider lands on the price versus value spectrum is entirely for the individual to say.
But what I do know is that fine subjective judgements come a lot easier when they are built on a foundation of all the relevant facts. That springboard for determining real value is what ARQ provides.
I’m afraid we can’t help when it comes to deciding which relatives to visit or which traditions can be retired this holiday period, but you can rely on ARQ to quickly determine which wealth managers are worthy of your time. Use us to unpick price versus value and secure a better deal for the year ahead.
This piece is for informational purposes only, and is not intended in any way as financial planning or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.