Need help with planning your finances? Take advantage of free financial planning surgeries across the UK during Financial Planning Week 8–12 May 2017Author and financial planner Carl Richards, in his book The behaviour gap: simple ways to stop doing dumb things with your money, stresses that herd-following investors sell low and buy high. It is easy to blame the economy or the financial markets when we lose money, says Richards, but the real trouble lies in the decisions we make. The distance between what investors should do and what they actually do has been termed ‘the behaviour gap’. So, exactly how can working with a financial planner save investors from making these mistakes as well as other poor financial decisions?

One way retail investors can close the behaviour gap is to work with a CFP^TM professional. “Most investment decisions are based loosely on the fear of getting it wrong, or in pursuit of making big gains,” says Danny Cox CFP^TM Chartered MCSI, head of communications at Hargreaves Lansdown. “This can lead to people moving in and out of the markets, or perhaps sitting on the sidelines too long. The best portfolios are ones which are set in stone and then left alone and the planning process helps to achieve this.”

Danny says another common error retail investors make when acting alone is leaving too much money in cash. “A planner helps the client understand how much they should leave in cash and how much they need to invest to meet their objectives. Understanding the amount of risk you need to take to hit your goals is one of the main benefits of using a CFP professional.”
Avoiding mistakesAsset management firm Vanguard backs up Richards’ findings that investors too often sell low and buy high. The company’s research finds investors usually lose money when they try to respond to news or anticipate events. 

The expertise of an adviser will help clients to stop making behavioural errors when it comes to investing and financial planning. Research by Unbiased, one of the services that helps consumers find a financial adviser, finds that savers who take advice save on average £98 more every month and receive an additional income of £3,654 every year of their retirement, based upon a pension pot of £100,000. Furthermore, a study by Old Mutual Wealth, Retirement income uncovered: the new normal, in August 2016 shows that UK retirees with a good financial plan, who see an adviser regularly, receive a retirement income that is 41% higher than those who have never visited a professional – the average income of an advised retiree is £24,175, compared to £17,168 for the non-advised. In total, a pre-retiree who has sought regular advice expects to have saved an average of £170,000 in pensions (excluding defined benefit entitlements) by the time they retire, whereas the total expected for a non-advised pre-retiree is just over £100,000.

The situation is similar in the US. According to John Hancock Retirement Plan Services, 70% of people who work with a financial adviser are “on track or ahead in saving for retirement”. This compares to 33% of those who do not work with an adviser. More than a third of the advised people surveyed in the company’s 2015 Financial stress survey had established how much to save for retirement, while half had contributed to an individual retirement account (IRA). For the non-advised, 14% were aware of how much they would need for retirement, and just 16% had contributed to an IRA.
"Understanding the amount of risk you need to take to hit your goals is one of the main benefits of using a CFP professional" Tax efficiency is another area where an adviser can provide valuable support. The 2016 TaxAction report from Unbiased and Prudential reveals that the UK’s total tax waste in 2016 could top £4.6bn, slightly down from last year’s £4.9bn due to auto-enrolment in workplace pensions. But, of the £1bn of tax savings gained through auto-enrolment, “£700m was wiped out by deterioration in other areas”. These include: not using tax-efficient savings and investments such as ISAs; failure to reduce capital gains tax; a lack of estate planning to reduce inheritance tax; and not saving enough into pensions.

Graham Bentley, managing director of UK-based investment consultancy gbi2, says: “Navigating the complexities of tax, matching strategies to investors’ goals, and understanding and implementing financial product solutions to optimise a client’s anticipated outcome requires high levels of expertise and experience. The CFP certification is the trademark qualification for that profession.”
Keeping you on trackGretchen Betts CFP^TM Chartered MCSI, managing director of Magenta Financial Planning, says a CFP professional will help investors focus on their goals and objectives, set out a plan to follow, and provide structure and discipline to savings goals and retirement plans. 

“This stops many mistakes, for example, impulsive purchases that you cannot really afford; or continuing to work when you could actually retire or reduce your hours,” says Gretchen. “With a CFP professional your investments will be managed specifically with your personal financial plan and goals for the longer term in mind and therefore can prevent you being swayed emotionally by current events or the economy, trying to ‘time the market’ or panic selling or buying shares.”

And it’s important to seek professional advice early on. Unbiased research finds a direct correlation between “people’s readiness for retirement and how early they had sought financial advice”. Taking a sample of 213 UK savers, when asked ‘How prepared do you feel for retirement?’, 71% of 18–24 year olds said they felt well prepared, compared to 39% of 44–54 year olds. 

CFP certification is the only globally recognised mark of excellence in financial planning. To be certified in the UK, advisers need to achieve the CISI Diploma in Financial Planning. CFP certification requires initial and ongoing education, experience and professional development requirements; passing rigorous exams; and adherence to a code of ethics.

Gretchen notes that working with a financial planner with CFP certification means consumers can be confident their planner has the highest professional standards. Communication with an adviser should also be an ongoing process.

“A CFP professional is interested in getting to know you, your goals and what will make you and your family happy in the long term. Doing this is not a one-off job; it is about an ongoing service and relationship. Once your financial plan has been implemented, your CFP professional will continue to work closely with you every year to monitor your plan and ensure it remains on track,” says Gretchen. “There are likely to be investments and other products to manage for you, but the primary goal of a CFP professional is to help you make realistic and achievable plans and simplifying your financial affairs – so that you can enjoy life and not worry about money in the future.”

So, for those looking to invest and build their wealth, purchase a financial product or plan effectively for the future, following the herd will get you nowhere – work with a CFP professional and “stop doing dumb things with your money”.