close menu

Avoiding unknown unknowns: Why investors need financial planners

by Mike Abbott | Jun 06, 2015
  • When asking a new client what financial planning is, I am usually met with a blank stare. It’s a vague term accompanied by many stereotypes. However in markets like the US and the UK, financial planning has become a fee-based profession. When you engage a financial planner you’re essentially paying money to save money. But does it work? What do financial planners do? And, as more people embrace DIY investing, is it worth hiring one?
    avoid unkown unknowns

    The first thing to note is that financial planning is a multi-disciplinary profession. There’s more than one way to measure planners’ value. They are investment managers, tax advisers, life planners and councilors – all rolled into one with a focus on your personal financial well-being. Through this integrated offering they add value in two principal areas – tax planning and investment management. Here’s how.

    Tax planning

    Domestic and cross border tax planning is one of the most complicated tasks imaginable, and where financial planners really prove their worth. The tax environment in most developed countries is subject to a greater rate of change now than ever before. Tax incentives are being used, removed and re-applied in different forms. Anti-avoidance legislation is increasingly complex as common reporting standards between countries interact with domestic legislation. The most significant tax savings we generate for clients is through the avoidance of tax errors. Retail investors need to pay heed to a stark truth: you don’t know what you don’t know. Making significant financial decisions without the input of a qualified adviser can result in unforeseen tax bills.

    Investment management – four essential building blocks

    The second main area financial planners add value is investment management. Some would argue that in an era of low cost index trackers people don’t need planners to run portfolios. However the cost of the fund is only part of the cost of the total solution. Once again, this isn’t a world you should enter without knowing what you’re doing:

    1. Wrapper selection

    What form does the fund take? (Pension? Offshore or onshore investment bond? Corporate wrap?) Each wrapper changes the tax treatment of the money going in, the money going out and the tax treatment of the growth. Wrappers also vary in the access they provide to the cash. Financial planning is the process of understanding how to use a range of different wrappers to create tax efficiency against an evolving set of personal circumstances. The issues to focus on in the accumulation phase are considerably different to the draw down phase. 

    2. Choosing a custodian or platform

    The funds you buy must be held in safekeeping by a custodian. If you buy them directly from the fund manager you will pay a very high entry charge that is avoidable if you retain a financial planner. This is because fund managers don’t want to deal with retail clients directly.

    3. Asset Allocation

    Next, investors need to consider portfolio construction. This explains 90% of the investment returns you achieve so you need to get it right. Asset allocation is the allocation of your investment pot toward different asset classes like equities, bonds, property, alternatives etc. Clients with self-managed portfolios are often too influenced by the financial press: this means they end up holding an asset allocation that is incompatible with their actual risk profile or capacity for loss. A good grounding in economic history helps to wash off the effects of the daily information soak. Experience and clear goals are needed to build a long-term investment plan.

    4. Choose your strategy – active or passive or both?

    Here we choose the method by which we access the exposure to the different asset classes. There are a bewildering array of strategies and fund designs which can be divided largely into two camps – actively managed collectives vs passively managed collectives. Active managers rely on their skill to try to pick winning stocks and generally hold smaller holdings of stocks or instruments. Passive managers put their trust in the market, and buy the equity or bond market by its composition (i.e. market capitalisation in equities and bond issuance by bond markets). A third option called Smart Beta is becoming popular. These are passive funds which modify the composition of the market in ways that are proven by academia to boost returns without resorting to the expensive business of stock selection. Our research (and that of academics) suggests that active fund managers’ performance (relative to the market, passives and smart beta) are very influenced by changes in fund size and overall market volatility. The case for passive investments in bond markets is also less clear than it is in equity markets.

    Once you have decided which areas of your portfolio will be active and which passive you need to build your asset allocation for the various short, medium or long term investments you have. Which areas of your portfolio should be allocated to equities, bonds, property, and alternative investments? Within each of those areas there are sub-sectors that require an allocation decision. The asset allocation needs to be matched to both the risk appetite and the capacity for loss. The problem that many retail investors face here is that although many people have an idea of their own risk appetite, very few grasp their capacity for loss.

    This requires an independent perspective. Experienced financial advisers have seen too many cases of clients losing more money than they could afford. We are trained sceptics weathered by the changeable nature of financial markets and long term effects of short term losses. We think of personal finance in the context of lifetimes. It’s very hard to take that helicopter view of one’s own situation.

    The above journey through the layers of financial planning has hopefully demonstrated the value of having your own financial planner. No matter how tempting it is to cut corners, a trusted relationship with a financial adviser is both cost effective and valuable for the peace of mind it offers.

    For more information on the topics covered in this post, or for any other wealth-related queries, you can contact us on +44 (0) 20 7759 7519 or email our wealth team.

    We are a professional services company that specialises in cross-border financial and immigration advice and solutions.

    Our teams in the UK, South Africa and Australia can ensure that when you decide to move overseas, invest offshore or expand your business internationally, you’ll do so with the backing of experienced local experts.

    • Hand depositing coin depicting Pound symbol into house-shaped piggy bank
      Should you remortgage or consider a product transfer?
      Sep 23, 2019  |  by Neil Ambrose
    • Town- houses
      How Shari’ah (Islamic) mortgages work
      Sep 06, 2019  |  by Ian Henning
    • Home Model
      4 things first-time homebuyers should do
      Aug 20, 2019  |  by Neil Ambrose
    • Property with price tage
      It’s a great time to buy your first UK property – here’s why
      Jun 03, 2019  |  by Marlon Borez
    • Handing over house keys
      Contractor mortgages: What you need to know for a successful application
      May 31, 2019  |  by Ian Henning
    • House rent protection
      Rental guarantees: What lenders think about rent protection schemes
      Apr 24, 2019  |  by Bill Monty
    • blended-families
      How “yours, mine and ours” complicates the estate planning process: Advice for blended families
      Apr 17, 2019  |  by Sherron Alexander-Bedingfield
    • Mortgage Concept
      The perfect time to secure a better interest rate on your remortgage
      Apr 03, 2019  |  by Ian Henning
    • growing tree
      The boom behind ESG investing – what’s actually driving the demand
      Mar 26, 2019  |  by Mike Abbott
    • Lightbulb working
      South Africa’s Retail Distribution Review – slow but important changes for investors and advisors
      Mar 05, 2019  |  by Mike Abbott

    South Africa

    Cape Town

    Regent Square
    Doncaster Road
    Kenilworth 7708 +27 (0) 21 657 2120


    25 Richefond Circle
    Umhlanga 4320 +27 (0) 31 536 8843

    United Kingdom


    One Croydon
    12-16 Addiscombe Road
    Croydon CR0 0XT +44 (0) 20 7759 7514



    9 Yarra Street
    South Yarra
    VIC 3141 +613 (0) 8651 4500

    Sable International is a trading name of 1st Contact Money Limited (company number 07070528), registered in England and Wales. We are authorised and regulated by the Financial Conduct Authority in the UK (FCA no. 517570), the Financial Services Conduct Authority in South Africa (1st Contact Money [PTY] Ltd - FSP no. 41900) and hold an Australian Financial Services Licence issued by ASIC to deal in foreign exchange (1st Contact Group - AFS Licence number 335 126).

    We use cookies to provide the best website experience for you. Using this website means that you agree to this. How we use cookies.