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Case Study: Evidence Based Investing - Mrs Jones

Posted by Scott Millar, Financial Planner

 


In this case study 
we will look at: 

  • How Mrs Jones moved from an actively managed portfolio to an evidence-based approach 
  • The significant reduction in annual fees achieved through an evidence-based approach 
  • The importance of working with an adviser who provides full financial planning and not just asset management 
  • How Mrs Jones was able to ride the wave of volatility in the short term without detriment to her financial wellbeing. 

The Specifics

Mrs Jones is a 68-year-old retired entrepreneur who became a First Wealth client in August 2019. She had previously been a client of a well-known wealth manager based in London, who had managed her portfolio for several years, but provided no financial planning. 

After a successful career in marketing, Mrs Jones sold her business fifteen years ago. Overtime, she has built up a significant portfolio of assets. She lives on the south coast with her small dogBob, in a property worth around £750,000 and has investment assets of around £1.7 million.  

Mrs Jones lives a comfortable lifestyle, spending her disposable income on contemporary Scandinavian furniturevisiting the local sailing club or embarking on an occasional holiday. Although she has no children, she has a niece and nephew of whom she is very fond of and would like to help them financially. 

The Problem

Mrs Jones no longer works, and therefore has no earned incomeShe relies on her State Pension and dividend income generated from her portfolio to fund her relatively modest lifestyle, spending around £40,000 each year 

When we first met Mrs Jones, she was worried about the income from her portfolio reducing her asset base, the tax she was paying on her dividend income and the possibility of running out of money in the future. Mrs Jones wants to enjoy life, live worry free and leave a decent amount of her money to her niece and nephew. Mrs Jones believed her investments were performing relatively well, but she also felt she was paying a lot in fees to her wealth manager. Her key goal was to achieve clarity and peace of mind for the future

The Goal

  • To make sure Mrs Jones has sufficient income and capital to live comfortably for the rest of her life. 
  • To reduce the stress and worry caused by market volatility.
  • To ensure that the performance of the portfolio and the fees she was paying are as efficient as possible. 
  • To make sure Mrs Jones can leave some of her estate to her niece and nephew. 


The Solution

With a life expectancy of a further twenty years, Mrs Jones was worried about the possibility of running out of money. 

By using a combination of financial coaching and cash flow modelling, the First Wealth planning team reassured Mrs Jones that she has sufficient assets, and that short term stock market volatility should not overly concern her. We built Mrs Jones a comprehensive financial plan involving evidence-based investing, inheritance tax planning and gifting; giving her the confidence she required.  

Our evidence-based approach invests in global equities and bonds via indices and therefore removes the need for expensive active fund managers. Data from the US shows us that a staggering 97% of US equity fund managers fail to beat the index over fifteen-year period (source: www.SPIVA.com). The uncomfortable truth is that with active fund management, you are paying for failure. 

At the time of engagement, Mrs Jones was paying for active management of her investments via her wealth manager (they provided no financial planning). We established that her annual running costs were in the region of 2.3% per annum. By moving to the First Wealth evidence- based approach, we reduced Mrs Jones fees to 1.6% per annum (a reduction of 0.7% or £11,900 each year). We also provided comprehensive financial planning for the reduced fee. 

Accessing the evidence-based approach gives Mrs Jones huge diversification of her portfolio, with approximately 14,000 holding spread across the biggest companies and government bonds in the world. We now generate income by combining her State Pension, selling down units in her portfolio, and utilising her annual capital gains tax allowance. 

Six months after Mrs Jones became a client, the stock market saw a significant downturn associated with the global pandemicAs with many investors, Mrs Jones was worried about the effects this would have on her portfolio and income provision. However, we were able to reassure her that her financial planning and cash flow model had incorporated this type of sell off, showed her real data based on the performance of the evidence-based portfolios in similar periods of extreme volatility, for example, the financial crisis of 2008, and the right thing was to do nothing. 

The planning allowed Mrs Jones to see her investments as longer-term, and when the markets picked up again, Mrs Jones was reassured she had made the right decision. 

Summary 

  • Value of investments: £1.7 million
  • Fees paid previously (active management no planning): £39,100 per annum
  • Fees paid currently (evidence based and financial planning): £27,200 per annum
  • Total saving: £11,900 per annum (£214,200 should Mrs Jones live to her life expectancy)
  • Annual tax reduction by selling units rather than dividend income: £1,900  

Mrs Jones also referred us to her Niece and Nephew who we now advise on pensions and investments and benefit from family linking which saves them c£180 per annum in fees. 

This document is Marketing Material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested

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