Dental regional manager Neil Richardson and specialist financial adviser Tom Chippendale share their insights into saving and investment for dentists.
What are the biggest considerations for dentists when it comes to investments and saving in the current climate?
Neil Richardson (NR): For all our clients we would always use a starting point of looking at their full circumstances. We look at their current life stage and what their plans are for the next 10 to 20 years. Then we break that down into manageable chunks.
We would then try to understand exactly what is going to be needed from their existing capital and spare income. Then we can draw up plans defining what can be apportioned to what. This is in terms of their objectives, based upon the length of time it is away. We would also look at which tax-efficient allowances could be used, such as pensions and ISAs.
The most important thing before providing advice is really understanding the individual you are working for. What do they want to achieve and when?
What does risk actually mean when it comes to investing?
Tom Chippendale (TC): How risk is interpreted is an interesting area in our industry. It is important that we, as advisers, educate our clients to help them understand that there is an element of capital at risk when investing.
For example, many people feel safe keeping their money in a bank account. But in fact there is a real risk here due to inflation.
Therefore, when advising our clients, we inform them that yes, we have to consider the risk to capital. But at the same time we would pose the following question: Are they willing to not invest, knowing that their money is being currently deflated?
NR: We regularly come across clients that view themselves as being at a certain risk level, but not necessarily acting in line with it.
One illustrative example of this was a client who had recently sold their practice. This individual felt they were risk adverse in terms of their investment philosophy. But it arose that they currently held their assets in two areas at opposing ends of the risk scale.
The proceeds of the sale of the practice were sat in their normal instant access current account. I found this staggering given it was over £500,000. Their only other capital was approximately £80,000 of shares in a Venture Capital Trust.
Their perception of the VCT was that it was low risk, as had been explained by their accountant when purchasing these holdings in the early 1990s. The reality, however, was that these assets would sit at the top of the risk scale in terms of the scope of our advice.
These clients had held these assets for more than 20 years and seen them fluctuate heavily in value, without questioning it. This implied that the clients were actually comfortable to some extent with taking some investment risk. Despite their initial feeling that this would not be something they would consider.
Could you explain diversification in terms of investments?
NR: Diversification is a risk management strategy that refers to the spreading of investments across different kinds of asset classes with different risk levels. This means that exposure to any one type of asset is limited. Typically, different asset classes react and behave differently.
Mixing them in the right proportions within your portfolio can reduce the risk of seeing higher volatility within your portfolio.
When helping clients to navigate investments, many of our advisers are keen to use our Guide to Investments. As they take clients through it, they will talk about the kinds of asset classes that can be used within investments, and about risk and reward thermometers.
They explain where each class asset sits on the thermometer and the relative risks that could come with that. The higher up the thermometer and the hotter the asset, the more return it could potentially give.
Having discussed the potential asset classes, and the relative risk levels, the adviser would typically move on to talk about the potential reward. Not just in terms of return, but also in terms of offsetting risk by diversifying across all the different risk levels.
The media’s been focusing a lot on artificial intelligence (AI) in various industries. What do you think this will mean for financial planning and saving and investments in the future?
TC: This is topical at the moment and something that we have to embrace and understand. It has many exciting implications for society and for financial advice and investment management. As a young adviser, I am excited to see how we can use AI to enhance the service we give over the next 10 years and throughout the rest of my career.
NR: I’m sure AI will aid and improve many areas of society and business. However, I don’t think the human element of being able to understand a person can easily be replaced.
You have to understand their position, emotions and their perspective. And then work with them on a bespoke basis to build something that is genuinely unique to meet their objectives.
The great dichotomy of a client-adviser relationship, as opposed to AI, is that an adviser may challenge the client and test them on whether they’re being true to themselves. For example, sometimes younger clients are reluctant to embrace saving for their future retirement. It is our responsibility in these situations to remind them that by not taking any action now, they are cheating their future selves.
This concept of challenging and questioning is a constant within any client advisory relationship and a very human trait. It is very difficult to see this being replicated by AI.