Although the use of financial planners is growing, most Americans still tend to take a do-it-yourself approach to building a portfolio and saving for retirement.
Forty percent of respondents in a 2015 survey by the Certified Financial Planner Board of Standards say they utilized financial advisors, an increase from 28 percent in 2010. And while most people are handling their own finances, there are distinct advantages to hiring a professional.
A financial advisor can give investors the discipline to resist investing or divesting reactively, says Angela Coleman, fiduciary investment advisor at Unified Trust Co., headquartered in Kentucky. "We take the emotion out of it," Coleman says.
With the Internet, the world is awash with financial advice, and professional financial advisors can act as a filter, says Andrew Barnett, relationship director at Global Financial Private Capital in Sarasota, Florida.
Financial advisors are a good option for helping clients assess their risk tolerance and then build a portfolio that actually meets what they want, says Drew Horter, founder and president of Horter Investment Management in Cincinnati. He says many people who want to be conservative with their money actually have portfolios that are riskier than they'd like.
Kimberly Foss, founder and president of Empyrion Wealth Management and author of "Wealthy by Design: A 5-Step Plan for Financial Security," recommends interviewing two or three advisors and having one to two meetings with each because this is a relationship that will last "hopefully for the rest of your life," she says.
There are hundreds of thousands of personal financial advisors in America — 249,400 in 2014 according to the Bureau of Labor Statistics — so how should retail investors pick an advisor, whether they are independent or work with a large brokerage, a regional bank or an insurance company?
Consider the fiduciary standard. Barnett advises people to seek advisors who are fiduciaries, which means they are legally responsible to put the clients' best interest in mind before their own.
Non-fiduciary advisors are required only to sell clients what they think is suitable for them. "Dealing with a fiduciary, I think, is critical," Coleman says.
The Department of Labor recently approved a new rule that would require all financial professionals who offer investment advice for retirement accounts to follow the fiduciary standard. But while that rule covers investments in IRAs and 401(k)s, it doesn't impact advisors who are recommending investments for a taxable brokerage account.
Know the pay structure and fees. Coleman recommends that people not pick advisors that are paid solely on commission. An alternative is fee-based advice, where clients are charged a set percentage of assets under management, she says.
Clients with fewer assets to manage may want to choose a fee-based advisor that charges by the hour or a flat annual fee, Coleman says.
Barnett notes that there are now more products such as annuities or real estate investment trusts available as fee-based products.
Opinions vary, but advisor fees could be anywhere from 1 to 2 percent of assets under management. If you have a lot with a financial advisor, that extra percent could be a tidy sum.
This fee is separate from other fees, such as those that come with mutual funds that are disclosed in the prospectus, so it's important to ask advisors if they can break down all the costs of investing, which can include trading, custodial, accounting and sales fees, Barnett says.
Do your homework. Investors should also check into an advisor's background, Coleman says. Know what certifications the advisor holds, and ask advisors for a list of current clients as references.
If an advisor won't provide references, that is a sign of a problem, she says.
In addition to references, investors should ask for an advisor's performance track record, Foss says.
Because a client may have a financial advisor for decades, it's important to find someone they like and trust.
Sometimes that can be accomplished by getting to know the advisor, Coleman says, "Find someone you've got a good rapport with."
Investing in shares is not without risk, but if you do your research and can commit to a long-term strategy you could prosper. Esther Shaw reports
Like many people who want to make their savings work for them, Louise Dungate has become increasingly frustrated by low interest rates. Undaunted by the prospect of taking a risk, the knitwear designer from Balham in south-west London decided to dip her toe in the stock market in an attempt to get a better return.
Despite the unsettled financial climate, the decision has proved profitable for the 29-year-old following her first investment 18 months ago. “Prior to that I’d had money in cash Isas,” she says. “As I’m self-employed I don’t have a regular salary, and need to make my money work as hard as it can.”
Dungate made her first investment in a self-invested personal pension (Sipp). More recently, she opened a stocks-and-shares Isa. “My Sipp now includes investments with Unilever and Lloyds. In the past 18 months I’ve seen the value of my portfolio rise by 4.74%,” she says.
Turning to the stock market could be a more attractive proposition for savers at present, with rates on cash at rock bottom. Ongoing low inflation, weaker economic data, global uncertainties and the weakness in the oil price mean there is little pressure on the Bank of England to raise interest rates any time soon.
Already, tens of millions of people have exposure to the market through their pension pot or Isa, but it’s been a turbulent start to the year. “It’s the worst start on record, in fact,” says Jason Hollands from adviser Tilney Bestinvest. “Markets have reacted to poor economic data from China. The FTSE 100 has been hit hard.”
But while the FTSE may have plunged, one of the upsides of lower share prices is that dividend yields have leapt up on many of these shares.
“The current yield on shares has increased significantly over the past nine months, with the yield of the FTSE 100 index now at a very attractive 4.25% per year,” says Patrick Connolly from adviser Chase de Vere. “The yields on some well-known individual shares look even more enticing, with HSBC at 7.6%, BP at 8.3%, Shell at 9% and Glencore at 14.4%.”
When you invest in shares, income is distributed in the form of dividends. These payments are usually made half-yearly as a reward for holding the company’s shares. As a shareholder you can either take the cash or use the money to buy more shares in the company. Reinvesting dividends can dramatically boost returns over the long term – provided the shares go up.
With yields looking good – Shell, for example, has committed to paying a dividend for the next three years – savers may be wondering about investing their money. The problem is, while the possibility of high yields is appealing, this doesn’t tell the full story.
“Income yields show the level of dividends paid as a proportion of the share price,” says Connolly. “The reason why many shares have attractive-looking yields is because their share prices have fallen, rather than because companies have been increasing their dividend payouts. It isn’t a good position for an existing investor to have a high yield on their shares if this is the result of them having already suffered a big capital loss.”
Many companies, and particularly in sectors such as oil and commodities, he says, are under pressure. “It would be no surprise to see some companies cutting the level of dividends they pay. This could, in turn, lead to further falls in their share price.”
Damien Fahy from finance website MoneytotheMasses, says: “Would-be investors shouldn’t just focus on the current yield of a share. They also need to focus on the likelihood that the dividend will be maintained – and indeed increased – year on year. Shell may have committed to paying a dividend for three years, but elsewhere there has been a swathe of companies cutting dividend payments.”
For Dungate the hope to getting a higher return on her money is worth the risk. “I appreciate that investing in the stock market is risky, but I’m willing to take this risk in the hope of getting a higher return. I’m not investing everything I have, and am prepared for the ups and downs.”
Should you take the risk?
While rising stock market yields may make shares more attractive than other asset classes – such as fixed interest, property and cash – you need to be aware of the risks involved.
“Unlike a cash savings account, investing in the stock market risks losing money,” says Justin Modray from finance site Candid Money. “It’s all very well enjoying a healthy dividend payout, but this may be little consolation if stock market falls mean you’ve lost 10% of your original investment.”
If you are simply fed up with the low rates on cash savings but would endure sleepless nights worrying about the prospect of losing money, the stock market is not for you. “It is better to put up with poor cash returns and sleep peacefully knowing your money is safe,” Modray says.
This is a view shared by Danny Cox from adviser Hargreaves Lansdown: “While the yields may currently be attractive, those uncomfortable with capital risk should stay in cash.”
Invest for the long term
That said, if you are happy with the idea of taking on some risk this could be the time to take the plunge.
“Right now the average variable rate cash Isa is yielding just 0.85%,” Cox says. “This makes the yields on stock markets look very attractive. Equally, investors who brace themselves for the ups and downs will look back at this as being a decent entry point. The UK markets are reasonable value, and a long way off their all-time highs – so provide long-term profit opportunity.”
The key is to only invest money that you can afford to leave there for at least five or 10 years – to smooth out any bumps in the market.
“The volatility of the markets may be off-putting for first-time investors, but the increased investment risk does mean that over the long term there is the potential you could achieve greater than you would from a savings account,” says Fahy. “According to the Barclays Equity Gilt Study equities have produced an average return of around 5.5% a year over the past 50 years. However, in that time there have been big market falls as well as rallies.”
HOW TO GET STARTED
If you are investing in the stock market for the first time, you need to tread carefully. Decide what you want to achieve, how long you are planning to invest for, and how much risk you are prepared to take. Does your homework or take advice – visit unbiased.co.uk, a website that helps you search for local financial advisers?
■ Investment funds investing in individual shares after researching a company carries a high risk. Reduce this by investing in a range of shares through investment funds.
■ Equity income funds for those looking to invest in companies with healthy dividends. Equity income funds typically invest in a spread of FTSE 100 companies. Top picks from Tilney Bestinvest’s Jason Hollands include Standard Life UK Equity Income Unconstrained, Ardevora UK Income, and the smaller company-biased Unicorn UK Income fund.
■ Shop via a platform Good for first-time investors, DIY investment platforms resemble an online supermarket from which you can select from a range of investments provided by different companies, but which are purchased and held in one place. These allow you to mix and match funds from a range of managers, plus you can access a wealth of research, information, tips and tools. Remember to look at the service offered as well as any administration charges, dealing fees and any other extra costs. Platforms include Hargreaves Lansdown, Bestinvest, and The Share Centre.
■ Costs Obviously these vary, and the cheapest option will depend on the types of investment you want, and how big your portfolio is. If you invest in funds expect to pay between 1% and 2% in charges. If you want someone else to run a portfolio of trackers for you – and do the asset allocation – Nutmeg is an option. With annual fees of between 0.3% and 1% it may be a good option for novice investors.
■ Use your Isa If you’ve not used your Isa allowance it is worth popping your funds or shares inside this tax-efficient wrapper.
■ Drip-feed your money Reduce the risk of market timing by investing regular premiums on a monthly basis rather than putting in a lump sum. That way if the market falls you simply buys at a cheaper price the following month. You may be able to invest from as little as £25 a month.
Whether it’s anxiety about paying the bills, guilt at spending, or feelings of inadequacy over our income, polls frequently show money to be a leading source of worry, and one of the main causes of rows between couples. Even the rich aren’t immune, according to Capgemini’s annual World Wealth Report, with top concerns for millionaires in 2015 ranging from how they will maintain their lifestyle to whether their offspring will mismanage their inheritances.
So how do we make peace with our bank statements and instead spend the wee hours calmly contemplating whether that car alarm will ever stop? The answer, at least according to some, lies not in spreadsheets and interest calculators, but in financial therapy. A burgeoning field in the US, where the five-year-old Financial Therapy Association counts more than 250 members, financial therapy combines traditional financial advice with a more touchy-feely psychological exploration of what is driving a client’s behaviour towards money.
It doesn’t come cheaply, of course, but financial therapists say we should think twice before rolling our eyes: they claim our emotional issues around money could be the exact reason we don’t have more cash to pay our bills.
They say the way we treat money is influenced less by logic and more by deep-seated beliefs that we are often unaware we hold. We may grow up watching our parents struggle with money and subconsciously develop negative, fearful emotions towards it, for example.
Low self-esteem can lead to the self-fulfilling prophecy that we will never make enough to be comfortable. “The obstacles that keep us from having more and being more are rooted in the emotional, psychological and spiritual conditions that have shaped our thoughts,” writes US financial expert Suze Orman in The Road to Wealth: A Comprehensive Guide to Your Money. “In other words, what we have begins with what we think.”
Financial therapists aim to identify and tackle a client’s psychological “blocks” about money through a mixture of established therapy techniques, such as asking them to recall early memories or write down word associations, and classic financial planning tools such as balance sheets and cash flows.
Practitioners tend to come from backgrounds that include psychology, marriage or family therapy, mental health, social work and financial planning, and what they offer depends on their training. A psychologist won’t necessarily be able to advise on Isas, for instance.
The practice has yet to make it to Britain – although Kristy Archuleta, president of the Financial Therapy Association, believes it is only a matter of time – but financial coaches such as Simonne Gnessen tread similar ground. The co-author of Sheconomics and founder of Brighton’s Wise Monkey Financial Coaching, Gnessen came to coaching via a course in neurolinguistic programming.
A petite woman with natural warmth, she had learned from her earlier, 10-year career as a financial adviser that traditional advice often doesn’t go far enough. “The financial industry tends to work on the basis that people are functional with money,” she says, with a wry smile. “You earn, you save a proportion, you always have the future in mind. In my experience, that isn’t the case and most of us are actually a bit dysfunctional.”
Financial coaching addresses the reasons we don’t always treat money in the way we should, identifying unhelpful patterns of behaviour and challenging attitudes we may have unknowingly developed over the years. Gnessen’s clients’ concerns range from debt to retirement, worries about providing for family to feelings of guilt about “undeserved” inheritances.
The reality of someone’s financial situation often has little bearing on their feelings about it, she says. “I’ve sat down with clients who will never run out of money in their lifetimes – and have the bank statements to prove it – yet I’ve had to reassure them again and again that they’re not going to end up destitute. The main issue from my point of view is whether someone’s money behaviour is supporting or hindering them – and if it’s hindering them, how can we change that?”
Sitting opposite Gnessen in her peaceful mews house office, I tentatively begin to describe my own feelings towards money. It’s possibly the first time I’ve ever discussed the subject from an emotional perspective and as we talk, I realise my attitudes are far from neutral, mainly oscillating between anxiety and an ill-advised recklessness.
Gnessen says she can understand the recklessness – it’s a time-honoured release from the exertion of self-control – but is curious about where the anxiety stems from. The idea someone wouldn’t be at least a little anxious about money is new to me, perhaps highlighting just how deep-seated the attitude is. When pressed, I identify debt, the precarious nature of freelance work and the prohibitive cost of living, but it strikes me that it’s something I’ve felt since the days when I only had my weekly pocket money to manage.
I think of money as an abstract concept, yet it’s inherently bound up with negative feelings. Although we start to unpick the reasons for this, I’m less interested in where the attitude has come from than how it’s holding me back and what I can do to overcome it.
Gnessen believes my worry about money is leading to some poor decisions in how I manage it. The debt I’ve accrued over years of renting in expensive cities and living slightly beyond my modest means is, at under £10,000, far from insurmountable, but it causes me grief. The solution is clearly to pay it off, but it’s not quite happening and Gnessen thinks this is related to my negative feelings about the situation.
I make hefty monthly repayments because they make me feel better initially (I’m tackling this problem!) but on an unpredictable freelance income they often end up leading to cashflow problems and more borrowing further down the line; cue more worry.
She suggests that instead of reacting to the anxiety the debt causes me by trying to pay it off quickly, I should instead focus on a more sustainable goal such as not accruing any new debt. I could then use the money “saved” by making more manageable repayments to build up an emergency pot I can draw on when times are tight, rather than resorting to more borrowing. The point, Gnessen says, is to balance the see-saw of emotions that accompanies the cycle of debt and repayment and encourage calmer, more rational financial behaviour.
Gnessen also thinks I have become too comfortable (in a miserable sort of way) with being in debt and am, inadvertently, ensuring I stay there. She points to the fact I have never allowed my borrowing to escalate beyond a certain level, but have frequently paid it down and then allowed it to climb back up again.
She asks me to imagine myself in a new situation and tell her what having money could do for me. I can only come up with not having to worry about it, which seems pretty good but apparently isn’t positive enough. Positive goals are known to be more motivating than negative ones, Gnessen says.
I’m not wholly convinced by this – wouldn’t there be a lot of rich daydreamers if that were the case? – and I struggle with the idea that worry isn’t also a good motivator. If we didn’t worry about paying bills and keeping a roof over our heads, I’m not sure many of us would go to work at all. Still, I concede that my perceived “reward” for getting out of debt is perhaps not enough of a reward and promise to work on finding a more meaningful alternative.
Talking about money with a stranger feels both exposing and liberating. It’s a subject that provokes strong emotions but we rarely discuss it even with our closest friends. Perhaps financial therapy just offers a much-needed platform to discuss these feelings with someone who won’t judge us. But I think it’s more practical than that.
For me, the soul-searching is interesting but becomes genuinely useful when it identifies patterns of unhelpful behavior. Given our tendency to repeat mistakes in other areas of our lives, I think most of us could benefit from a closer examination of our attitudes to money.
Financial coaching with Simone Gnessen starts from £185 for a two-hour session.
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