Effectively managing your wealth is the bedrock of so many life goals, not to mention maximising your peace of mind. Yet all too many people fall prey to these common wealth management mistakes.
Working out an effective wealth management plan calls for expert advice which takes in a whole range of factors. Each individual and situation is different, but with that said there are some general precepts we can all follow – and mistakes to avoid. Eradicate these, and you’ll be on your way to full wealth health.
1. Allowing wealth to languish as cash
Cash may feel “safe”, yet the reality is it is likely to be anything but in a world where rock-bottom interest rates prevail. Inflation can erode the purchasing power of cash wealth at a truly alarming rate, and there are numerous alternatives that can offer better returns for very little increase in risk.
Inflation can erode the purchasing power of cash wealth at a truly alarming rate, and there are numerous alternatives that can offer better returns for very little increase in risk
You should also be aware that cash deposits are only government protected up to £85,000 per institution. Diversifying among several may be wise if you have large amounts of cash or are depositing with several firms operating under the same banking licence.
2. Not being realistic about risk
The market tumult resulting from the coronavirus pandemic made many DIY-investors realise that their assumed risk-profile was not perfectly aligned with the reality of their finances – or need for psychological comfort. Risk-profiling exercises are highly nuanced and must be repeated regularly by a skilled expert if they are to provide a solid basis for a wealth management plan.
A sensible approach to investment risk isn’t all about minimising it, however. One of the most significant long-term threats to wealth is not taking on enough investment risk to keep it growing at least ahead of inflation.
3. Failing to get time on your side
Compound growth (returns on returns) is what will do the heavy lifting when it comes to increasing your wealth, and the longer compounding happens the bigger the rewards. It never too early to make your wealth work as hard as it possibly can and you may be surprised at the relatively modest levels of wealth the firms on our panel work with.
Compound growth (returns on returns) is what will do the heavy lifting when it comes to increasing your wealth, and the longer compounding happens the bigger the rewards
Contrariwise, it is never too late to take action. If you have retirement funds that could be better managed, or are facing significant Inheritance Tax liabilities on your estate, there is always action that can be taken. Take advice as early as you can, but never think that it is too late to improve your situation
4. Not matching investment strategy to life stage
Although we should all be investing to maximise net returns and minimise risk at any age, the finer points of your strategy should very much be a function of your life stage, particularly when it comes to retirement funds.
Although we should all be investing to maximise net returns and minimise risk at any age, the finer points of your strategy should very much be a function of your life stage, particularly when it comes to retirement funds
At a simple level, younger people have longer to recover from losses and so might look to take on more investment risk than those close to retirement. Really clever planning goes further, however, and looks through the accumulation and decumulation phases right through to legacy planning. Ensuring your income meets your needs lifelong is the kind of modelling work wealth managers excel at.
5. Not paying enough attention to net returns
You should always think about investment performance in terms of net returns, rather than headline figures firms may like to use in their marketing literature. A full appreciation of all the fees and charges that eat into your returns will make it clear how much of a drag on performance these will prove over time.
Seemingly small differences can compound over the years to make a huge difference to your eventual financial position, so ensure you are paying only as much as you should
Seemingly small differences can compound over the years to make a huge difference to your eventual financial position, so ensure you are paying only as much as you should. The shortlist of firms our smart matching tool generates makes it easy to compare firms side by side on costs and performance.
Top Tip
Of all these potential errors in managing your wealth, falling prey to complacency is arguably the most damaging. Unless you stay proactively engaged, you may not notice fees creeping up over time or investment performance falling behind the sector’s best. We’ve made it easy and fast to compare a shortlist of providers like for like, so take your chance to check the deal you are getting, whether you are a new or seasoned client.
Lee Goggin
Co-Founder
6. Not digging deep into investment performance
It would be easy to think that wealth managers are all pretty much the same when it comes to investment performance, yet that is emphatically not the case. When assessing a firm’s returns make sure to do this over several periods stretching back several years and insist on peer comparison data too.
It is also in your interests to understand performance benchmarking to know which is the most meaningful for your portfolio. Many people have a major index like the FTSE100 in mind, but this may not be a sound indicator of how a global portfolio diversified among asset classes should perform.
7. Neglecting tax considerations
Tax mitigation is one of the key pillars of managing wealth effectively, but this is neglected all too often, particularly by DIY-investors. Your investments and financial planning need to be aligned so that your allowances and reliefs are maximised, and you should use tax wrappers to shelter your gains as much as possible.
Your investments and financial planning need to be aligned so that your allowances and reliefs are maximised, and you should use tax wrappers to shelter your gains as much as possible
There are an array of perfectly legitimate tax planning strategies you can deploy to get your exposure down and this could make as much difference to your wealth position as any investment returns you achieve. A good wealth management adviser will always have an eye on tax, even if you take your formal advice on this elsewhere.
8. Narrow investment horizons
While most investment portfolios will be built around the traditional asset classes of equities and bonds (in addition to cash), you could seriously lose out by not allocating a proportion of your wealth to alternative investments.
Diversifying your portfolio to include commodities, collectibles, hedge funds, private equity or even Bitcoin can help significantly boost returns and reduce risk. There may also be tax benefits to be gained too. Make sure that any alternatives investments are precisely aligned with your time horizon and goals, however.
9. Failing to think about wealth across the family
It is difficult to overstate the benefits of taking a family-wide view of wealth, and not just in terms of harmony. The gains in terms of investment results and tax benefits can be immense. The starting point for couples is to make sure they are using their tax allowances and reliefs efficiently, and that their investment strategies are aligned.
The really significant benefits begin when families think intergenerationally, however. Given the right amount of lead time, the older generations can pass money down with very much reduced Inheritance Tax due on their estates. But there is so much more families can achieve if they think about things like school fees, pensions, gifts and bequests as one unit.
10. Allowing complacency to creep in
You should always feel that you are getting the attention and value for money you deserve. So many of our users admit that they had been underwhelmed with their adviser for a long time (sometimes many years) and that this has costed them dearly in terms of lacklustre returns or fees which had crept up.
It is good practice to regularly review your wealth management plan and your provider too. Finding out about alternative providers is incredibly empowering, and will either confirm that your choice remains valid or reveal what you could gain by moving
It is good practice to regularly review your wealth management plan and your provider too. Finding out about alternative providers is incredibly empowering, and will either confirm that your choice remains valid or reveal what you could gain by moving.
Although this list is not exhaustive, it covers the biggest – and most pernicious – wealth management mistakes we have seen over the years. At root, many of these are about getting proactive and giving the management of your wealth the attention it deserves. This doesn’t necessarily mean spending lots of time or carrying out endless research, but simply making sure you have the right advice at the right time.
If you are concerned that you aren’t making enough progress on your wealth journey, or that there are vital pieces of the puzzle that remain unaddressed, there can be no better time to address these issues. Answer just 15 questions and our smart matching tool will reveal your best-matched sources of advice.
