This article is part of my Q&A series on financial advice. Today’s question is ‘Why you should not use a financial adviser?’
One of the biggest questions that investors grapple with is not how to find a financial adviser, but whether to use their services in the first place!
After all, financial advisers are seen by some as a ‘luxury’; an image probably supported by their relatively high cost. Therefore when making an investment with a large lump sum, people take a while to consider whether they should or should not use a financial adviser.
Why you should not use a financial adviser
1. You are investing a small sum
You are investing such a small sum that even basic advice fees would eat up a significant portion of your investment.
The objective of saving money is of course, to save it.
There’s no sense in spending £1,000 on advice for how to invest a £5,000 sum. This would trigger a 20% loss before you’ve even started – giving your investment an uphill battle to even recover to its starting value, never mind provide positive returns.
This is why most financial advisers screen their prospective clients, and only recommend that you seek professional advice when investing £20,000 or more. Some firms with higher fees may use a £50,000 rule of thumb instead.
This ensures that the fees they charge will feel proportionate and better value for their customers.
If you are only investing a small sum, consider whether you could get free financial advice.
2. You are knowledgeable and/or experienced
You are confident, capable and knowledgeable about investing and are happy to build your own investment portfolio.
3. You only want a low-risk plan
If you plan to keep your savings in simple, low-risk, products, then you probably don’t need financial advice.
Examples of these include:
- Bank and building society savings accounts
- Long term savings bonds (offered by banks and building societies)
- NS&I savings products, backed by the government.
A quick read of the website or leaflet of these products should give you plenty of information about the rewards and (limited) risks of these products.
You should feel like you can make a perfectly informed decision without any guidance for these products.
But you should still consider advice anyway
Even if you meet one of the categories above, you should still consider the need for financial advice.
- Small sums, when invested regularly over a long period could become a significant amount overall.
- Even knowledgeable investors can make mistakes.
- Low-risk options can perform poorly over very long periods, meaning you could be missing out on savings.
If you reach a point in your investing journey where you feel that a financial adviser has no valuable insights to offer you – I urge you to reconsider. This could be evidence of hubris, which doesn’t bode well.
It’s always helpful to have a sounding board and hear about the latest fact-based recommendations.
It is worth remembering that many financial advisers are happy to hold an introductory meeting for no fee and no commitment. There’s little risk in having that conversation, and later making a decision not to take financial advice if you still believe that it would be in your best interest to ‘go it alone’.