A financial planner could help your clients avoid making these investment mistakes

It’s claimed that Albert Einstein once referred to compound interest as the “eighth wonder of the world”. While this might be an exaggeration, it’s true that the power of compounding can help your clients grow their wealth over time and could be key to helping them achieve their long-term financial goals.

While a cash savings account may provide some growth, investing could be a more effective way to harness the power of compound growth, beat inflation, and achieve meaningful returns.

However, investing can be challenging and many people don’t know how to successfully balance risk and generate growth. Indeed, according to FTAdviser, 87% of UK retail investors believe they lack the knowledge to successfully manage their portfolios.

Unfortunately, this means that your clients may be prone to making common mistakes that harm their investment returns and affect their ability to work towards their goals.

That’s where we come in, as we can give your clients the guidance they need and help them avoid certain investing pitfalls.

Here are three common investment mistakes that a financial planner could help your clients avoid.

1. Focusing on short-term performance

American investment analyst Kenneth Fisher once said: “Time in the market beats timing the market”.

What this means is predicting market movements and making trades at the “right” time to avoid losses and maximise gains are unlikely to pay off because nobody can see into the future. Instead, it may be better for clients to leave their wealth invested because, despite short-term fluctuations, over the long term, markets typically grow.

Indeed, according to the London Stock Exchange (LSE), the FTSE 100 saw a total return of 25.68% between 6 April 2000 and 6 April 2024. This is despite several periods of volatility caused by the war in Iraq, the 2008 financial crisis, and the Covid-19 pandemic.

If investors panicked and took their wealth out of the markets during these upsets, they would have missed out on future growth when the markets recovered and continued growing.

Unfortunately, your clients may make the mistake of focusing on short-term performance instead of the potential for long-term growth.

We can help your clients avoid this mistake in several ways.

First, we can help them develop long-term goals that they can focus on. We can also use cashflow planning to demonstrate how the long-term growth they might see on their investments could improve their ability to reach their financial goals and achieve their desired lifestyle in retirement.

Most importantly, we offer crucial reassurance during periods of volatility. When your clients are concerned about their investments falling in value, we can remind them of their long-term plans and give them the confidence they need to remain invested.

2. Succumbing to cognitive biases

Investors need to weigh information, balance risk, and make decisions. Unfortunately, the decision-making process is often influenced by cognitive biases – illogical patterns of thinking based on past experiences or existing beliefs.

There are several cognitive biases that could affect investors including:

  • Loss aversion – The tendency to feel the pain of a loss more acutely than the pleasure of a gain, causing investors to be too risk-averse.
  • Confirmation bias – Only considering information that confirms an existing belief and discounting anything that challenges the belief.
  • The “house money” effect – The tendency to make riskier decisions with investment gains as they don’t see it as their money.

If your clients allow these cognitive biases to cloud their judgment, they could make decisions that don’t align with their long-term financial plan and may harm their investment returns.

Fortunately, we can help them avoid cognitive biases when developing an investment strategy. For example, we might explain the importance of adopting risk to potentially improve their long-term returns. Additionally, we can help them find ways to balance risk, such as diversifying their portfolio, so they feel more comfortable and are less prone to loss aversion.

We’ll also perform due diligence on any potential investments and act as an impartial sounding board. This helps clients decide whether a certain investment is suitable for their financial plan without falling victim to confirmation bias.

If your clients want to adjust their investment strategy, we can discuss the potential effects of any changes now and in the future. This ensures that they can make informed decisions and follow an investment strategy that aligns with their long-term goals.

3. Not considering the tax they could pay on investments

Your clients may pay certain taxes on their investments and if they don’t plan for this, they could pay more than they need to. This may be more likely after recent changes to Dividend Tax and Capital Gains Tax (CGT).

Dividends – a portion of a company’s profits paid to shareholders – can be an effective way to generate an income from investments. Your clients might withdraw the income from dividends or reinvest it to help their investments grow.

However, in the 2024/25 tax year, your clients may pay tax on any dividends from non-ISA investments that exceed their “Dividend Allowance” of £500.

Any dividend income that exceeds this allowance may be taxed and the rate your clients pay will depend on their marginal rate of Income Tax. They could pay:

  • 8.75% if they’re a basic-rate taxpayer
  • 33.75% if they’re a higher-rate taxpayer
  • 39.35% if they’re an additional-rate taxpayer.

The Dividend Allowance fell from £1,000 to £500 on 6 April 2024, meaning that your clients may be more likely to pay tax on their dividends than they were in the past.

Additionally, your clients may pay CGT when selling non-ISA investments. In 2024/25, your clients can earn up to £3,000 from selling qualifying assets without triggering a tax charge. This is known as their “Annual Exempt Amount”.

Any gains that exceed the Annual Exempt Amount will be taxed at a rate of:

  • 10% for basic-rate taxpayers (18% for a residential property that isn’t their main home)
  • 20% for higher- and additional-rate taxpayers (24% for a residential property that isn’t their main home).

The CGT Annual Exempt Amount also halved on 6 April 2024, meaning that your clients may be more likely to pay CGT when selling their non-ISA investments.

Failing to account for these taxes could mean that your clients pay more than they need to. This may reduce their investment returns, making it harder to achieve their goals.

We can work with them to find solutions that help them retain more of their wealth. For example, they can contribute up to £20,000 across all their ISAs each year and investments in a Stocks and Shares ISA are free of CGT and Dividend Tax. Plus, you don’t pay Income Tax when you withdraw funds from an ISA wrapper.

Additionally, clients may be able to transfer investments to a spouse or civil partner without paying CGT, allowing them to benefit from both Annual Exempt Amounts.

These are just some of the ways that we might be able to help your clients reduce the tax they pay on their investments.

By helping your clients avoid these common mistakes, we can support them in developing an investment strategy that allows them to meet their long-term goals.

Get in touch

If your clients need support with their investment portfolio, we are here for them.

They can contact us at hello@ardentuk.com or call 01904 655 330. As an award-winning financial advice company with advisers included in the 2024 VouchedFor Top Rated guide, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate cashflow planning or tax planning.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Get in touch

By talking about your current situation and listening to your aims, we create a personalised plan that will put you on a path to achieving your aspirations.

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