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Common misconceptions about wealth advisors can create obscurity and can lead clients to appoint advisors based on unhelpful criteria. In this piece, we lift the lid on what actually matters when it comes establishing a meaningful relationship with an advisor, and what really goes into creating a wealth strategy.
SCRUBBING AWAY THE MYTHS
Investment portfolio performance is something that we and our wealth management peers get asked about a LOT. In fact, we think that the industry and to some extent the mass-investing culture of the past thirty years or so has effectively conflated investment management with what a good wealth manager actually does.
“My friend is a really successful investor/financial professional, so I don’t think she needs a wealth manager”, or a variation on this theme, is something we hear regularly.
Wait, isn’t investment performance important?
Yes, but not as important as you might think. Like its closely related cousin, Cost (which we’ll come onto later), we would consider it a ‘hygiene factor’. They’re both important in the same way that your GP being sufficiently qualified, competent, and doing no harm is important. Good to know, but hardly differentiators…
Spot the difference
It is no big secret that the investment management industry today is highly homogenised. Net of cost, investment returns adjusted for risk tend to sit in very similar ballparks no matter which manager you choose. Broadly speaking, traditional managers are not able to go off-piste, and similarity of returns across the industry reflect this.
As an example, the Six Degrees investment philosophy is certainly not rocket science. It is aligned with a simple set of beliefs, which we hold extremely dear to our hearts: that markets are generally efficient, no one can predict the future, diversification is essential, time in the market is related to long-term outperformance, risk and return are related, and that costs matter. Hardly controversial.
At what cost?
“What will it cost me?” and the related but no less important “How am I being charged?” should be straightforward questions for any wealth manager to answer. Costs have a major impact on long-term returns, and although the industry has become a lot more transparent when it comes to fees, we think there is more that can be done.
It was important to us for example, to build an offering which was as cost effective as possible. Again, it’s not rocket science that lower costs and faster wealth appreciation for clients are correlated.
So, what really matters?
Working with an advisor who explores, challenges and ultimately helps you to identify the purpose of your wealth is crucial. Welcome to the start of an advice-led conversation.
The start of the journey is the most important part to get right. We think that working with an advisor who explores, challenges and ultimately helps you to identify the purpose of your wealth is crucial. Welcome to the start of an advice-led conversation.
Advice aligns your strategy both with what you need the wealth to achieve, and its ultimate purpose.
Perhaps the most tangible and impactful area of planning is, in industry parlance, what we call ‘structuring’ but in real English, it’s about the best way for you to hold an investment portfolio to meet a given objective.
Structuring one’s wealth properly has the biggest overall impact on long-term wealth appreciation. More impact than our old hygienic friends, Investment Performance and Cost could ever hope to have.
More than one way to hold a portfolio
Establishing purpose, goals and what the wealth is to be used for, will influence which holding vehicles or ‘wrappers’ might be appropriate.
No matter the amount of your liquid assets, it is usually beneficial to hold a portion of cash and maybe an investment portfolio in your sole name or joint names with a spouse. This allows easy access to the funds should you need them, and enables you to use yours and potentially your spouse’s tax allowances.
Creating significant liquidity – an amount north of say £2m, but it’s not an exact science – requires advice as to what other instruments, tools and wrappers might be useful.
Cash(flow) is king
Cash flow models can be used to show how much (and indeed whether any) investment risk needs to be taken. In fact, finding out the minimum amount of investment risk one needs to take to achieve a given objective is an incredibly useful exercise, and can help to clarify the required investment strategy.
That’s a wrap
Some wrappers can help the funds to grow within a more tax favourable environment, enabling investments to benefit from gross compounding. Others can give you more control over when and who pays tax on the family wealth – creating efficiencies and aligning with succession plans.
In good company
UK company structures are also a popular form of investment holding vehicle, especially with business leaders who are already familiar with companies and how they operate. They can help with gifting wealth to children without necessarily giving up control, and with tax efficient distributions to the family.
Trust thy neighbour (or spouse, or kids)
Lastly, trusts have an important role to play as well, whether in gifting assets, passing wealth to beneficiaries who are currently too young or not yet ready to receive it, and in creating a legacy for future unborn generations.
The above areas are by no means an exhaustive list, but hopefully provide a flavour as to the importance of using the right tools for the right job and understanding the wealth’s purpose. Many clients may end up with a combination of several different structures, each earmarked for different uses in the future, and structured to ensure that the wealth sits within the best environment for that specific use.
Sounds complicated?
It doesn’t have to be. A good advisor will listen, understand, outline recommendations clearly, and implement these recommendations on your behalf.
We find that a one-screen view of your entire financial picture is an incredibly effective simplifier, and can be achieved using an accessible and intuitive desktop and mobile app. Goodbye to that spreadsheet.
Lastly, receiving ongoing advice and not paying more for it, is as important as the initial advice. The one thing we can all be sure of is that our lives will be buffeted by unforeseen events, and having your advisor on hand enables plans to be tweaked, adapted and amended along the way.
This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances. The value of investments may go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance. The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances. Please note that the Financial Conduct Authority (FCA) does not regulate some aspects of cash flow, estate or tax planning or trust advice.
