By Ahmed Bawa, CEO of Rosemount Financial Solutions (IFA)
Advisers play a crucial role in supporting their clients in improving their financial health, in building wealth which will support their lifestyle not just today but in the years ahead. Doing so usually involves some form of investment, yet the potential risks around putting money in stocks and shares can prove a barrier for clients.
This is highlighted by a recent study from LV= which found that more than half (52%) of UK adults are more comfortable keeping their money in a bank account rather than investing in shares, while a similar proportion (55%) said they were more concerned about possible losses than potential gains from investing their money.
Meanwhile just one in four said they would accept the potential of losing money in order to pursue long-term growth from their investments.
The cost of caution
It’s easy to understand why some will prefer to keep their money in cash. There’s very little risk involved, since they know that no matter how mediocre the rate of return may be, they will still end up with a larger balance than that which they started with.
However, this cautious approach can be seriously costly when it comes to the long-term health of a saver. Over the last few years, with inflation consistently high, it’s usually been impossible to secure an inflation-beating return from a traditional savings account.
As a result, even with the rates of interest on offer improving, savers may have seen the value of their money fall in real terms.
Sacrificing returns
This is highlighted by some recent analysis from AJ Bell, looking specifically at the typical returns from cash ISAs compared with those designed for investing in stocks and shares.
Over the last year, the average cash ISA has paid a rate of 2.7%, compared with the average 12.7% achievable from investing in a global equity fund or the 7.4% from the average UK equity fund.
The difference becomes even more striking when you consider longer time frames. Investing in an average cash ISA over the last decade for example would have secured a
return of 12.2% overall, compared with 141.8% from global equity funds or 55.8% from UK equity funds.
So while investing obviously comes with greater risks, the chances of securing a more substantial return over the longer term are much higher too.
I don’t want to lose money
Investments come in all sorts of different shapes and sizes too, so it’s crucial for advisers to help their clients find the right investments for their circumstances. There will be lower risk options or ways of mitigating against the potential to lose money, perhaps by making more use of tracker funds, which will allow the client to benefit from the greater returns available without taking on the risk of investing in more volatile assets.
Ultimately the adviser needs to act as educator here. Clients come to financial advisers precisely because they value the expertise and guidance on offer, and sometimes that will mean talking clients round on their preconceptions and concerns.
This is often the case when it comes to more longer-term products, such as pensions and life insurance, where the client (and their family) may not see an immediate benefit but would be better off in the long run from early adoption.
Finding a better balance
There’s no doubt that cash has a role to play. It’s important for savers to have some money that they can access in the event of emergencies, and so keeping a portion of their stash in cash makes sense for these purposes.
But it’s important for advisers to ensure their clients understand that opting for cash alone will have repercussions on their long-term ability to build wealth.
Instead, finding a better balance will leave those clients better off over the long haul, and trusting in an adviser can ensure they find that balance.
The role of networks
Intermediaries are not alone when it comes to overcoming the concerns of their clients. Networks have a big role to play in supporting their appointed representatives in feeling more comfortable over making the case for allocating some funds towards investments.
At Rosemount Financial Solutions (IFA) for example we run bespoke training programmes, helping our members build up their specialist knowledge, as well as peer sessions which allow advisers to pick the brains of more-experienced colleagues and get their insights into potentially problematic cases.
Ultimately most advisers want help from their network, whether that’s on mortgage advice, pensions or investments. It’s only by delivering the support which they need as individuals rather than a ‘one-size-fits-all’ approach that those advisers can reach their potential and ensure that their clients are able to build their long-term financial health.
