The bargain hunter

financial planners can add up to 3% p.a. net returns to a client’s portfolio

Since the global meltdown we seem fixated on getting a bargain. There is a belief that cheap is best. We see the adverts which tell us if we go to a certain discount supermarket, we can get their own brand items at significant discounts to the leading branded equivalent. We read as a result of this that discount supermarkets will become dominant players in the future.

I just wonder whether people are now starting to question this.

The shop

We recently went to a festival and did our shopping at a discount supermarket. The shops own brand of instant noodles were a bargain price of 15p, compared to ‘Super Noodles’ at 60p. It made sense to me to buy the cheap ones after all we could get 4 for the price of one of the branded equivalent.

We did buy some of the branded equivalent; which was lucky because the own-brand version was actually pretty disgusting and ended up being a waste of money!

What you find with discount retailers is that often the quality is not as good and they don’t have everything you need. In some cases you will find goods are more expensive. So in the end you have to go elsewhere to get everything you need which is a false economy.

Don’t get me a wrong they can and do work, but cheap is not always best.

The running shoe

My first pair of running shoes were purchased on-line for £20. Every half marathon I did I ended up with a black toenail. So I went to a running shop and got fitted and paid £80. After five years and many miles it was clear the shoes were well past their sell by date.

I looked online and although there were many bargains, trying to find the shoe I wanted was very confusing. I went back to a running shop and after half an hour I walked out with a new pair of shoes and £110 lighter! I went on-line and found I could have purchased the same shoes for £90.

At first I felt cheated but then I realised that actually I was paying a premium to get something that fitted correctly.

The financial planner

We read of the impending demise of the financial planner. In part this is because there seems to be misunderstanding of what they do, and in part it is a perceived lack of value.

Investing for the future seems really easy; we can buy an off the shelf ISA or Pension and invest some money. Job done, retirement sorted. But it is more complex than that:

  • Where do we invest?
  • When do we retire?
  • What income do we want?
  • What are our goals?
  • What is the best value product in the market to deliver on our requirements?

In some cases just saving for retirement is all we can afford but as we save more, and have more money, our needs change and it becomes ever more complex.

Whether a financial planner charges £150 an hour, 0.5% p.a. or 1% p.a. it is less about the money and more about what they are doing for us.

If I take the running shoes paying the extra £20 was important to get a shoe that fits, if anything goes wrong I can go back to them. Paying a little more for quality food (if you can afford it) is better for us. And so paying for a financial planner although it adds to the cost can be the best investment ever made.

Vanguard recently did some research over a ten year period that showed financial planners can add up to 3% p.a. net returns to a client’s portfolio. The biggest contributor to this is acting as an effective behavioural coach. This is focusing on the long term perspective and having a disciplined approach, this is worth 1.5% p.a. Other areas included cost effective investments, rebalancing, retirement income and asset allocation.

So if the argument is correct, then on average if doing it yourself returns 4% net per annum, a financial planner should deliver 7% net per annum (even after taking 1% p.a. in fees). This makes a big difference.

To conclude

We like bargains and there are times where this works. Books, CDs, clothes etc but even within this we might be prepared to pay more. Signed CDs are a premium that people might be prepared to pay for. Cheap food seems good but if you can’t get everything you want or the quality is not as good are we prepared to compromise on this. Cheap food may seem like a bargain but if the quality / taste is lacking then is this a worthwhile compromise?

And it all leads down to the running shoe and the financial planner. We pay more to get a good quality running shoe to get something that fits and works for us, the same should be true of our investments. There is no point wandering down a path with no clue on what we want to achieve. The financial planner can add that direction. Understanding what they do for you is important and done well (even with a fee of 1% p.a.) they can add up to 3% net p.a. to the value of your assets.

So be a selective bargain hunter, not all bargains are what they seem!

NOTE: This is written in a personal capacity and reflects the view of the author. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.

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