REFORMS to the way financial advice is charged for in the UK have led to a sharp uptick in the number of investors shunning advisers in favour of self-managed portfolios bought through a platform. The Retail Distribution Review (RDR), introduced at the end of 2012, stopped advisers taking commission from asset managers, making them charge clear, upfront fees. By October 2013, the proportion of retail investors who said they never take financial advice had risen to 31 per cent, from 26 per cent two years before.
It can be cheap, but going it alone is difficult. Jason Hollands of Tilney Bestinvest says that many DIY investors “end up accumulating odd museums of previously hyped funds, and an asset mix that may not suit their risk and goal profile.” Here are five tips on how to get it right.
THINK CAREFULLY ABOUT YOUR GOALS
Are you investing with a house deposit in mind, or for retirement in a few decades time? Financial goals have a huge bearing on the mix of assets that’s appropriate for you, says Maike Currie of Fidelity Personal Investing, with variables like age, wealth and risk appetite also playing a key role. An individual with a high salary in their mid-30s looking to guarantee a similar income in retirement, for example, can and should take on far more risk than someone saving for a round the world trip in a few years’ time.
Investing with specific goals in mind can also provide greater focus, says Patrick Connolly of Chase de Vere: “It means people can monitor whether they are on track, making changes to their investment strategy and contribution levels if needed.” Recent research by Nutmeg found that 75 per cent of people using a commitment device to save (a picture of their goal or a direct debit, for example) reached their aim, compared to 53 per cent of those who didn’t use such a device.
“Tax eats away at the returns on your savings and investments,” says Danny Cox of Hargreaves Lansdown, and using vehicles like Isas and Sipps can make a huge difference. In tax terms alone, Interactive Investor’s Rebecca O’Keeffe says, Sipps tend to come out on top, with “marginal tax relief on contributions, up to 25 per cent tax free cash on retirement, and the fact that pension contributions reduce taxable income.” But for those who may need to access funds before retirement, the flexibility of Isas tends to win out. Like Sipps, an Isa wrapper will shelter your investments from income and capital gains taxes.
RESEARCH PLATFORM PRICING
The industry impacts of the RDR reforms continue to be felt, with a price war between the major DIY investment platforms helping to reduce costs for consumers.
But as O’Keeffe points out, your choice of provider can still have a huge impact on returns depending on your investment needs. Platforms with a “flat” fee structure, she says, tend to suit investors with large existing portfolios, while percentage charges are better for those relatively new to DIY investing. Those who like to buy and sell stocks and funds regularly, meanwhile, may want to opt for a platform that provides plenty of research, and should watch out for transaction charges (which can cost roughly £10 per trade).
GET THE RIGHT RISK PROFILE FOR YOU
The time horizon of your investments will go a long way to determining the level of risk you should take on, says Hollands. “The longer your time horizon, the more risk you can potentially take, because you have the time to ride out any short-term volatility.”
According to Currie, a common mistake is to take on too little risk when saving for later life, particularly by only thinking about the accumulation of assets up to the age of retirement. “Remember that you are planning for a life after 65,” she says. “Arguably, you still have another 20 years – possibly longer – ahead of you to reap potential gains from your investment choices.”
But James Robson of Plutus Wealth says there’s also a psychological element to consider. “It’s about how you’ll react if markets suddenly fall – can you ride out the storm, or are you likely to want to sell and change your strategy?”
KNOW WHEN TO SEEK ADVICE
Finally, it’s vital to know when to opt for advice. Connolly says that thorny financial issues like pension benefits and inheritances can be particularly tricky to deal with alone. Others may simply wish to delegate portfolio construction to an expert. Given that many companies will offer a no obligation consultation, it’s probably worth picking up the phone if you’re in any doubt.