Blog - Why should you pay for a financial adviser?
"Why should I pay for your services?"
This is probably the most important question in any service based business as the majority of services do work that is intangible and a financial adviser (planner) is no different. Every client for a financial adviser is a human being and has different challenges and opportunities so communicating value to other people outside the client and adviser relationship is often difficult. I am not an accountant or a solicitor, it is very rare that you “need” to hire a financial adviser and if anything it has slightly gone out of fashion.
I will freely admit that for a time, I would continually face this question of value and struggle with it - I think they call it the “imposter syndrome” . I don’t care who you are or where you are in business, there are lots of times that you will question your product or service. It is natural and once I learnt to embrace it, I started to enjoy the challenge.
Around 2 years, I decided to go Niche in my approach to clients. I decided that I would only take on younger entrepreneurs and now that is even more defined in the Creative, Digital and Tech Sector. Since then I have really started to understand the issues and challenges that my audience has with their finances and I have built a service around this that I am confident in. I also believe I can make more impact at an earlier stage before the mistakes or poor advice from the kid of advisers that I wrote about in the last blog.
Every week due to my Niche I deal with smart people. They are usually good with numbers and good at identifying the value of certain relationships but on reflection many of those I come across had never been exposed to proper financial advice therefore I needed to find a way to communicate my value to this audience.
In these communications, I often talk about 3 key areas where some physical (tangible) value of hiring a good financial adviser:
This is a great starting point. For most business owners, looking after your financial affairs is something that doesn’t really take priority. If you are like most entrepreneurs I work with, your time is either spent in your business or running after a chaotic child in your spare time. It takes real discipline to dedicate time to running your finances properly and unfortunately this often leads to inertia.
Now the question every good business owner and family owner needs to ask themselves is “how valuable is my time”. There is a really good article by James Clear on this so I won’t bother repeating but in simple terms, as a business owner it is important that you understand the value of your time and allocate resources accordingly. If your time is worth £150 an hour, you shouldn’t be doing £25 an hour tasks like phoning up energy companies. Quite a simple illustration but you get the point.
As an example if you were responsible for £400k turnover in your business and using James Clear’s approximate time spent working of 2,500 hours (50 hour weeks with 4 weeks holiday) then your time alone is worth £160 an hour and this doesn’t even equate to the capital part of the equation (i.e the capital value your are building). For a £1m turnover the figure goes to £400 an hour.
I estimate that it takes around 2 hours a month (24 hours a year) to look after your finances properly. This is based on experience and it includes time consuming tasks like paperwork, income and expenditure tracking, utilising tax allowances, investment decisions and research and continual reviewing your situation particularly for business owners who have fairly complex affairs.
Value of Time - 24 hours x £160 an hour to do a proper job of your finances = £3,840 per annum
If you are building capital value or if you spend less than 50 hours in the office a week and maybe value your family time more this figures gets quite a bit higher. I work with a few clients who put values of over £1,000 per hour on their time.
Knowledge or Ability
The financial services world is a myriad of complexity. I took 14 exams following a Finance Degree to become a Fellow! Now you don’t need to go this far when you are running your own finances but to say that a lay person’s knowledge comes close to a proper financial planner is not even close to the truth.
Every week I read a fact in a money paper or a money forum that isn’t true written by unregulated individuals. The Government are continually changing the legislation particularly for business owners and it is really hard to translate the jargon spewed out by financial services into simple terms.
The biggest issue in this section is getting it wrong or incorrect. Let me give you an example; I recently set up my own life cover through the business. Why did I do this? Because I knew of a specific piece of legislation that means that life cover premiums written a certain way could be paid without being a benefit in kind and is also tax deductable for corporation tax purposes. This piece of knowledge alone saved around 49% in tax. I come across life policies all the time for business owners that should have been implemented this way.
Value of Knowledge - Premiums £30 instead of £60 for life cover = £180 per annum or £3,600 (over the course of the term of 20 years)
This is just one aspect of a person’s finances. When you start to look at the marginals gains of knowledge or ability in investments, pensions, life cover for example the tangible value starts to look quite significant. Even referring a client to the right professional can result in huge gains to the client.
This is the last of my 3 physical or tangible values you receive from a good financial planner. Dealing with financial institutions is probably one of the most painstaking tasks possible. We recently wrote to a well known pension company for some information on a fairly simple policy. It took 7 weeks (after 6 chasers) to get the information. Again this relates to time, but luckily I have a great team behind me as if it was me as a client I would have lost the will to live with it and the pension would have stayed in a poor underperforming and overexpensive fund!
See, inertia has a (often negative) value. In this case, the client was paying around 0.5% more than they needed to on this historical policy and it wasn’t performing very well. It could cost the client around 2-3% at least to keep the policy as they didn’t have the patience to harrass them. That could cost a significant amount of money over the long term, nearly £80k if you were paying £5k per annum for 20 years and the net return was 2.5% instead of 5%. These things matter and I see people who have left their old work pensions in the same place for years without reviewing it.
Value of Willingness - £80,000/20 years = £4k per annum
Value versus Fees
So there you go. The above is actually a live case study of my finances :) I am lucky as I have a team of other advisers and admin staff to help me out but if I didn’t, I reckon that I would be losing at least around £8,000 of value per year if I didn’t have the time, willingness and knowledge to do a proper job of my finances.
My finances are fairly simple and the reality is now that I am pretty confident that I can add serious tangible value to the clients I work with. So when I quote my fixed fee to look after a business owner, the physical value I am expecting to add is often a multiple of at least 4-5 x fees. If I am quoting a fee of £2,500 I am looking to add tangible value of at least £10k. This just makes better business sense for both parties.
What I haven’t talked about here is the emotional value of having a good financial planner. Sometimes for my clients, the thought of having someone to oversee all of their finances and make sure the pieces fit together allows them to think clearly about other things that are more important to them such as their family or business. We all often have that little doubt in the back of our mind that we aren’t making our money work hard enough. A good financial planner removes this doubt and enables the client to see the future clearly and adapt to any challenges or opportunities that lie ahead.