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Financial Planning v Wealth Management

At Magenta, our clients know that we follow an evidence-based approach to investing our clients’ portfolios. This means we don’t try to time the markets, we don’t try to stock pick and we don’t try to beat the market. All we aim to do is to obtain for our clients the returns which are available to all investors, at the lowest possible cost and commensurate with their attitude to risk. Most crucially, we do this with reference to their personal lifetime cashflow forecast which helps us to see what returns are required by each client to achieve their goals.

This makes us very different from the ‘wealth managers’ who only offer a portfolio management service, with no financial plan to provide the vital context. Furthermore, a large proportion appears to believe – in spite of the overwhelming evidence to the contrary – the active managers’ mantra that engaging in market timing and stock picking will enable their clients to obtain market-beating returns and that therefore providing a portfolio management service alone will justify both their fees and the fees of the funds in which they invest their clients’ money. Wealth management without financial planning is arguably not wealth management at all.

In many ways they have no choice but to continue banging that drum. After all, if they accepted reality and helped their clients to invest in a range of passive funds, when all that would then be required would be the occasional rebalancing, how would they justify their fees? It infuriates us that it is the clients who ultimately pay for this ‘emperor’s new clothes’ fallacy. There’s undoubtedly a huge amount of (investors’) money spent on maintaining the illusion that active management is cost-effective for the investor – there are far too many snouts in the trough for any other course of action.

That said, the total costs of investing, and whether they provide value for money to the consumer are now also starting to be debated by the UK government.

There are signs that the tide is turning and investors are – quite rightly – starting to question the fees that they are paying to both their portfolio manager and to the active fund management industry. The problem for those managers is that when you strip out the portfolio management, what added value do they really provide in order to justify their fees?

The difference between a portfolio management service and a service comprising portfolio management and comprehensive financial planning is immense. The value that a good financial planner can add in terms of positive outcomes for clients exceeds the cost of their fees many times over.

Well we would say that wouldn’t we? We’ve got our own drum to bang, after all. There is, however, ample research to back this up. A study by the University of Texas in 2012 examined the differences in outcomes for individuals working with a comprehensive financial planner and those working with transactional salespeople. The results of the study found markedly improved financial outcomes for those working with a good planner.

In addition in 2013 Morningstar undertook a study which identified what it refers to as ‘gamma’- which is ‘designed to measure the value added achieved by an individual investor from making more intelligent financial planning decisions.’ Morningstar’s study concluded that incorporating a number of specific components which any good planner would include in their service offering to help their clients to make sensible financial planning decisions was equivalent to obtaining an additional 1.82% annual return.

We strongly believe that the comprehensive financial planning service which we provide for our clients, and which forms the foundation on which the portfolio is then built delivers value for money. In fact, we won’t take on a new client unless we are confident that we can clearly demonstrate to them that our fees are good value.

If you are not yet a client of Magenta, how well does your wealth manager measure up?

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