In this final post, we look at the last three areas where good financial advice can make a difference to how and where clients invest their money.
5. Making the most of tax rates
I fully accept that this won’t apply to all clients and an adviser won’t be able to practice this all of the time, but it’s still worth knowing.
The premise is – if it’s at all possible, to ensure that the investments that are in the bond asset class are in tax-sheltered environments and your equities are in the taxable environment. This is because higher-rate taxpayers would pay 40% tax on bonds and 32.5% on equities, so there’s a slightly more favourable tax benefit.
It’s common sense and a small thing, but it’s worth something every year, and helps an adviser articulate to clients what they do for them. It might go on behind the scenes, but it shows that the adviser is ensuring they’re in the right place – asset location if you will.
6. Spending Strategy
This is around behaviours again – when people retire, where do they spend from? People would say: “I spend from my pension, which is what I’ve been paying into for the last 40 years for”, which throws up the question: “Is that necessarily right?” Might it be better for people to spend from ISAs or other accumulated investments, or those which are less favourably taxed, leaving your pensions to stay in the favourably taxed environment?
Absolutely, particularly if you have an Inheritance Tax problem. Pensions are, for the most part, outside of your estate and can be left to your family far more tax-efficiently than otehr assets, such as property or ISAs
Left to their own devices, people will take money from their pension because they rightly believe that’s what it’s there for. This is true, but leaving it in a tax-favourable environment is a good idea if you have other assets that you could spend from first.
7. Investing Style
Vanguard have examined the pros and cons of taking an income from traditional income products versus taking it from total return. The principle is, if an individual is going to chase yield by buying into income-producing products, in today’s low-yield environment, he or she may find themselves in risky assets.
These could be lower-grade bonds or longer duration to get the higher return. What Vanguard recommends is not doing this blindly, and understanding that within these income-producing products you may well be changing your asset allocation back to the first point.
We’d say to clients: Don’t let your income need wag the asset allocation dog, and look at whether there’s a better option, such as looking to cash in units and using that to supplement income in lower-yield environments and returning to the lower-income products as and when yields are higher.
Bringing it all together
Looking at the seven areas and the numbers that Vanguard have attached to them, the two most important are the behavioural coaching and the asset allocation.
We use the figure of about 3% per annum, and these seven areas add up to about that – net – over and above what an investor may achieve on their own, and half of that 3% is attributable to the behavioural coaching. Asset allocation is where the whole journey begins, and if it isn’t understood, then a lot of the rest of it becomes meaningless.
Neil agreed that it is possible for investors to do this on their own and take into consideration the seven areas, although it wouldn’t be an easy thing to do. More products and services are emerging to support investors without advisers which can help them developed a structured approach, but these won’t replace the behavioural coach.
Vanguard is clear that people need to have a choice on how they access investing, but they’re pro-advice and advisers, and would recommend the investors seek the support of a good adviser.