One of the most effective ways for a financial adviser to help a client achieve efficient financial planning is to explain the critical importance of financial planning advice and regular financial reviews.
Who has not, at some time, read the warning that ‘the value of investments can fall as well as rise’? Despite this, over 1 in 5 stock market investors stated that they never take financial planning advice to review their fund investments, in a recent survey by the pensions and retirement division of Prudential. In response, Prudential emphasised the wisdom of regular financial reviews with the comment “It is staggering how few are seeking financial advice.”
The dangers of failing to seek financial planning advice are not limited to pensions and investments, however. Failing to review your financial plan may cost you thousands over your whole financial portfolio, from savings and investments, to personal insurance and your mortgage.
Here we look at these individual areas, to show how, by neglecting your financial planning, you fail to adapt your investments to market and other changes, as you build your financial plan. The flip side is clear: great savings are possible by streamlining your financial planning with regular reviews with your financial planner, and a very hands-on approach to your money.
Financial Planning Advice - Funds and Stock Markets
A financial adviser can show you, the client, any number of league tables charting the performance of the funds where your savings, investments, and pension may be invested. What may strike you is the fact that, year upon year, the leading funds in any sector may have changed, as market conditions and the fortunes of individual investments rise and fall. Your own attitude to risk may change over time, creating another impetu to review and realign your holdings. The advantages of financial planning are clear here – a very active investment strategy is crucial to keep your money where it is working hardest for you, switching if necessary out of an underperforming fund and into a better fund. In 2009, over 11% of investment funds were classified as ‘dog funds’, at the bottom of the market measured by performance. More shocking still, the poorest performers included some of the largest funds on the market*. The amount of money invested in dog funds in the UK more than doubled during 2009, from £7.2bn to £14.2bn, as more recession-hit funds sank into the dog fund category. Only those investors working with their financial planner could be alert to these developments, and act as needed to fine-tune their investments.
Financial Planning Advice - Pension Planning
Many pension savers forget that their pension savings are not simply held in a ‘pension fund’ – they are invested on the savers’ behalf by the pension fund manager. As a result, pension savings are, indirectly, very much a stocks and shares investment, and subject to the same short-term fluctuations as conventional investment funds. They can, therefore, also be monitored for maximum efficiency, and changed and switched to better performing funds if needed. Visiting your financial planner to review your pension planning on an annual basis is crucial, to ensure that you are on track to achieve your desired income in retirement.
Of course, in relation to pensions, financial planning has a special and secondary meaning. For over half of the UK population, neglecting financial planning here means not having a pension set up at all – which was the case for 52% of the working population in 2009, according to Halifax. This situation has given the industry the phrase ‘pensions timebomb’, as the dreadful consequences of such a lack of financial planning will take their toll, not immediately, but in the decades to come.
Financial Planning Advice - Savings
Many savers, living their busy lives from day to day, put their financial planning on the ‘back burner’. This often means that they have large sums languishing in bank or building society accounts, where returns, in the current low-interest climate, have rarely been so low. Again, good financial advice would show savers that shifting this cash into Individual Savings Accounts (ISAs) would mean that no tax is payable on growth. Furthermore, both cash or stock market investments are available. Other tax-efficient options include Venture Capital Trusts (VCTs), which offer 30% tax relief on cash that can be invested for at least 5 years, and Enterprise Investment Schemes, which offer tax relief of 20% on savings invested for the shorter term of 3 years.
Financial Planning Advice - Mortgages
If you have had a mortgage for several years, you may be coming to the end of an initial mortgage deal. If you decide to stay with your existing lender, you may be moved to their Standard Variable Rate (SVR) of interest, which may or may not be the best deal for you. At this point, financial planning advice will make you aware of the various mortgages available to you. Mortgage holders working with their independent financial planner may decide to switch to a different mortgage deal with their existing lender, or check the whole mortgage market in search of a better mortgage deal. In the end, you may well decide to stay with your existing lender. If so, fine! There is a huge difference between opting to stay put based on good information, and opting to do so based on no information!
There is intense competition between mortgage providers for the business of those with equity built up in their homes, and taking financial advice is key to taking advantage of that. In relation to mortgages, the advantage of regular financial reviews was brought home recently, when research showed that seeking out an independent mortgage adviser and actively reviewing your mortgage will save you, on average, £962 per year on your mortgage payments!**
Financial Planning Advice - Insurance
Life insurance is traditionally regarded as a once-off investment which, once purchased, is left in a bottom drawer and forgotten. In today’s market, nothing could be farther from the truth. Industry watchdog LifeSearch revealed recently that in the last decade, the cost of term insurance has dropped by 50%. This means that good financial planning can find you a cheaper deal with a new policy, even though you are older.
If you are interested in taking a more active investment strategy and fine-tuning your savings, investments, insurances, mortgage and pension, make a financial advice enquiry or call 0800 6785929 now
*Source: investment management company BestInvest, October 2009
**Source: Association of Mortgage Intermediaries, 2009
