Tempted to manage your investments and personal finances on your own? Think very carefully before you do. DIY financial advice can easily go badly wrong.
Something that sets rockwealth apart from other financial planning firms is our belief in financial education. For us, the rules of successful investing and financial planning should not be a closely guarded secret. We want to share them, and not just with our clients, to help as many people as possible to enjoy financial wellbeing. That’s why, for instance, we post educational videos and articles such as these so regularly.
You may be wondering, “If I can learn the basics, could I manage my investments and personal finances on my own, without a financial adviser?” Unfortunately, there isn’t a simple answer to that question. Why not? Because you might be able to do it successfully, but you would be taking a significant risk.
What exactly do we mean by saying that DIY financial advice is risky? Well, think of someone you know who has worked very hard to achieve their current standard of living. Now imagine them coming to you and saying, “You’re an intelligent and trustworthy person. I’d like to pay you to manage my family’s wealth on an ongoing basis. I need you to ensure we avoid any pitfalls, and to do your very best to make our money grow.”
Do you think that’s realistic? Would even your closest friends trust you enough, given your specific skillset, to ask you to do that for them? Would they honestly take that risk?
Now, let’s say, however unlikely it might be, someone did ask you to take on that responsibility. Would you feel comfortable doing so? Do you genuinely think you would have the time and knowledge required? And are you sure you wouldn’t let them down?
It’s hard, I would suggest, for most people to answer Yes to any of those questions. The point is, if you really wouldn’t want to manage someone else’s wealth, you certainly shouldn’t consider managing your own.
Why DIY financial advice appeals
There are two main reasons why people are tempted to be their own financial adviser. The first is that they overestimate their own abilities and understanding. Human beings are hard-wired to be overconfident and to assume that we will do things better than we actually do. Perhaps you’ve tried to fit your own kitchen or bathroom, or fix your car, for example, and ended up regretting it.
There are some things, though, that really are best left to the experts. For instance, if you thought you had a serious medical condition, you wouldn’t rely on Google for a diagnosis or course of treatment. And very few people would want to represent themselves in court.
Financial advice falls into the same category. Why? Because there is huge potential for things to go wrong, and, if they do, the consequences could be very serious. A good example is running out of money in retirement — a thoroughly humbling experience that more people experience than you might have thought. Nobody wants to rely on their loved ones to pay the bills in later life.
The second reason why people try to manage without an adviser is that they want to save money. I absolutely get it. Even if you pay a fixed annual fee, as most rockwealth clients do, it’s not an insignificant expense. But trying to avoid advice fees is often a false economy.
Good advice pays for itself
In my experience, good financial advice will more than pay for itself. In fact, research by Vanguard has shown how, for some people, on an annualised basis, working with an adviser can add around three percent in net investment returns.
Vanguard gives several reasons why having an adviser can make such a positive difference to your returns. These include asset allocation — ensuring your money is invested in the right assets — and cost-effective implementation. Another reason Vanguard cites is rebalancing; in other words, adjusting your current asset allocation back to the target allocation, thereby ensuring a smoother path towards your investment goals.
However, the main reason Vanguard gives for those with advisers enjoying higher returns than those without is what we call behavioural coaching. This involves guiding clients to make rational decisions by helping them manage emotional reactions, like fear, greed or regret, that can lead to poor investment choices. Behavioural coaching is especially valuable if it prevents you from acting on impulse during periods of market volatility or in a long-drawn-out bear market.
This sort of irrational behaviour is extremely common. Recent research by EY, for example, shows that 73 percent of people change their investment behaviour after a decline in the value of their portfolio. And the more often investors act on their emotions, the more it generally costs them. Over a lifetime of investing, a lack of discipline can reduce the size of your retirement pot substantially.
Advice isn’t just about investing
Another important thing to remember is that a good financial adviser won’t just help you with investing, hugely important though that is. They can also arrange a smooth transition of your wealth to your children and grandchildren, for example. They can assist with tax planning and end-of-life planning. They can also make sure you have the insurance cover you need.
But arguably the most valuable thing an adviser can do is to help you work out your priorities, construct a robust financial plan, and, crucially, adjust that plan in response to changes in your circumstances. For us at rockwealth, everything we do for our clients is based on holistic financial planning.
One final thing. Don’t underestimate the time and effort required to manage your own finances, to ensure that you stay on track and to keep abreast of the latest tax changes affecting pensions and investing. Again, you could make a decent job of it, but, by the same token, you could easily miss something important which could end up costing you dearly.
Ultimately, it all comes down to clarity and peace of mind. If those two things are not important to you, DIY financial advice might be an option for you. If, however, they are important, as they are to most of us, a good adviser is well worth paying for.
FIND OUT MORE
Want to find out more about rockwealth Cardiff and how Matt Millard can help you to achieve your goals? Then give us a call or send us a message. We would love to hear from you.
