Finding the best place to put your investments and KiwiSaver can be tricky, but you don't have to do it alone.
A financial adviser can help build a portfolio based on your risk appetite and goals. An adviser with a fiduciary duty will have tools to asses how much risk you are happy to take and develop a plan to reach certain milestones in your life.
In addition to setting up an investment portfolio and necessary insurance cover, a financial adviser also provides regular monitoring to ensure you are keeping on track to achieve your financial goals and always remain in your corner if you have concerns about portfolio performance or how certain political/economical events may hit your investment returns.
However, there is no free lunch in the financial world! It costs money to receive financial advice, so it is no wonder questions arise such as "Why do I need advice?" or "We can invest ourselves via an app, can't we?"
A common misconception is that a financial adviser's role is to generate returns on your investment, and while this is of course a key element to help achieve long-term growth – what about all of the other areas of value that is added?
Research studies over the past 15 years have now started to see evidence that there is a quantifiable increase in return from working with a holistic financial adviser, outside of investments. Specifically, a study from Russell Investments identified the following key areas of value.
Appropriate Asset Allocation – 0.90% p.a.
With a plethora of investment apps available at the push of a button and the promise of "quick wins", it can be tempting for investors to build their own portfolios. However, unless you have the expertise and substantial time to research, you are unlikely to have an investment strategy that meets your needs, with the appropriate level of risk.
One of the key elements here is ascertaining if you have enough risk to meet your goals so that you do not fall short of meeting them, or if you are taking more risk than necessary to achieve them. The role of the adviser is to understand your goals, and tolerance to risk, and then formulate an asset allocation with the appropriate balance to give you the highest probable chance of achieving them.
Behavioural Mistakes – 2.2% p.a.
Behaviour coaching is one of the greatest value adds to having a financial adviser. Effectively managing a client's emotions when markets get shaky can mitigate them from making wealth-destroying decisions. Equally, advisers can help clients navigate any fears that make them focus on losses rather than gains, which can see people acting on the emotion of short-term volatility and jeopardise their ability to meet their long-term goals.
As they say in poker, scared money don't make money. An adviser can refocus the perspective on your long-term goals and remove emotions from the tools used to help you achieve them.
Cost of Cash – 0.6% p.a.
While cash is important for liquidity, short-term goal funding and dampening volatility, having too much cash sacrifices growth and reduces your spending power each year, with inflation increasing the cost of living. A trusted adviser can find the right balance of a well-diversified portfolio personalised to your specific needs.
Tax Effective – 1.5% p.a.
While a financial adviser is limited in the realm of tax in comparison to an accountant, they have the knowledge of managing and optimising personal and superannuation investment tax. This includes structural tax strategies, portfolio strategies, and tax implications of rebalancing, buying or selling. A good financial adviser will also work closely with a client's accountant and solicitor for more complex needs.
Expertise – Priceless
The framework wrapped around advice starts with deep, meaningful conversations including goals, personal circumstances and preferences, and translating this into a plan. By continuing to track and adjust as necessary with changing circumstances and unforeseen events, clients have increased confidence in their direction and decisions in life, long-term perspective and ability to drown out the noise. Access to expert knowledge and experience is invaluable, particularly through times of change, and most importantly, regain your priceless time back by outsourcing the complexities of managing your financial affairs.
So, overall, that is an impressive 5.2 per cent of potential return every year beyond investing, from having a trusted adviser.
No doubt the plethora of robo-advice or DIY trading platforms out there will build an investment portfolio in under an hour. But one wrong move such as lack of diversification can lead to catastrophic losses.
On the other hand, an adviser can do a lot of the legwork and conduct the necessary due diligence in setting up and monitoring an investment portfolio ensuring your portfolio is diversified across different assets, sectors and regions, so any poor performance can be offset by positive returns elsewhere in the portfolio.
Ultimately it is the added value of long-term relationships with your financial adviser and the journey you go on together that matters when building true meaningful wealth.
• Nick Stewart is an Authorised Financial Advisers and CEO at Stewart Group, a Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions.
• The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz