Not taking enough risk early on, failing to get proper financial advice and living within their means are common issues for clients, according to Eleanor Ingilby, head of high net worth at atomos.
People can make a financial mistake at any time in their lives, whether it be in their teen years or as they come into retirement.
For the younger generation, it is often the case that they do not take enough risks. Atomos asks clients to complete questionnaires to assess individuals' risk tolerance. For those in their teens, 20s and early 30s, people often misunderstand their ability to stomach volatility.
“They're telling me they're not going to touch the portfolio in the long term, they're not going to use it for, say, 10 to 15 years, yet when they do the risk profiling, they'll come out as very low risk,” she said.
“I think that's due to a lack of awareness around the markets and this desire to protect the assets they've been given actually overriding the risk they can naturally take.”
Typically, people in this situation have either never invested before, meaning they are fearful of losing money, or they have had their fingers burned before by investing in individual stocks that did not go so well.
As such, the firm has to not only look at a person’s willingness to take on risk but also their capacity for loss. Put another way, it is the need to take risks, rather than whether or not they want to.
This is because, for younger people inflation represents the biggest risk of loss to their money, particularly if savings are going to be held for a long time. These scenarios both lead to younger generations applying too much risk to equities compared with the actual level of volatility.
“So probably my biggest challenge for younger clients is actually pushing them to take an appropriate amount of risk, rather than what they think is an appropriate amount of risk,” said Ingilby.
This is becoming a more prevalent issue right now, Ingilby noted, as she has seen a significant increase in “intergenerational wealth transfer” – older generations passing down their wealth to avoid inheritance tax or increased taxation through gifting.
“I would say in the past couple of years it's really sped up. There have been a lot of clients trying to take advantage of that seven-year rule and gifting quite a large amount of assets to their children,” she said.
As people age, their priorities change. Often, those in their 30s and 40s have several areas that require their finances. Whether it be getting married, buying a house for the first time, starting a family or spending on more exotic items like new cars and big holidays, this age is one in which it can be difficult to keep on top of finances.
“There's a lot of drawdown on your assets,” said Ingilby, who said there are a plethora of options for any spare cash, from overpaying mortgages to “playing the long game” by investing.
“I think the biggest challenge is persuading them not to draw upon [savings] for additional things and to actually live within their means and leave portfolios to grow and do the job they should be doing,” she noted.
“So that's probably the biggest challenge I have for clients of that age: persuading them to almost completely ignore their portfolios and leave them alone for a bit.”
Finally, approaching retirement, the biggest issue is that people are too lax about seeking financial advice, often only choosing to do so when they have their pension – and therefore a large amount of money to invest.
"I'm a portfolio manager; I can do so much. But it becomes incredibly important as to which pots you're building and what you are then drawing down upon, because that matters hugely,” said Ingilby.
Tax regulations have changed dramatically in recent years, with the UK going through successive governments and changes in prime minister that have made cuts or freezes to various different taxes. This has meant people have had to be “incredibly adept” at making sure they are using their cash in the most tax-efficient manner.
“It becomes about what you are taking, why you are taking it, what you are still adding to, and whether you are doing all of that in the right order. That becomes the biggest challenge at that stage,” she said.
For example, it can be tempting to pile into a pension when people get to their 50s, but they must ask themselves why they are doing so. One reason has historically been that it is inheritance tax-exempt, but this is no longer the case.
“So should you be paying into your pension, or should you be maxing out your ISAs to give you more potential flexibility potentially later? That’s a big question we're getting. I think it's incredibly important to make sure you're filling up the right pots at that stage,” she concluded.