As financial planners one of the key aspects of our proposition is to understand an individual’s goals and then draw up a plan to deliver on those goals. I certainly wouldn’t hide from the fact that the way we invest money is also an important part of the proposition we deliver to clients and we do look to add value by outperforming the benchmark set for the portfolios.
Perhaps, we focus too much on the delivery of goals and the aim to outperform the benchmark because when we under-perform it is this that we are judged on rather than the years that we outperform. In fact research shows that even the best of the best can struggle to outperform all the time.
The point of this is that actually the performance is only a part of the package (and an important part) but there are other aspects which are just as important. Often the media focus on the fee you pay and judge it against the performance, why pay a fee of say 1% when you could do it yourself and outperform your financial planner but the 1% fee is much more than the performance of the portfolio.
I challenge the fact that a financial planner will also do things that the average DIY investor will not:
A rational head
One of the hardest things is not to follow the herd; we often get caught up in the rush. So bubbles draw us in because we want something that others have had, equally when crashes happen we rush to exit with no clear plan of what we are doing. Patient and careful investors will be rewarded because often they are contrarian and they don’t chase the quickest return i.e. they adopt a get rich slowly approach.
I would argue that the Financial Planner is that rational head when everything else is irrational. They will ask you questions that you don’t ask yourself when doing your own investments. Examples of the types of questions are things like – do you have a will, are your children going to university and how will you fund this, what will you do if you lose your job, when do you plan to retire and if you have to go into a nursing home how will you fund this.
These are difficult questions and often ones we will not discuss when we do our own investments, if we can answer these types of questions we can then start to have a rational head because any decisions we make come back to what we are looking to do.
Having a plan
For a long time I have argued about having a plan, we often read about DIY investors and how they have made a fortune by going direct. Remember there are many DIY investors who have lost a fortune by investing. But often it is not about the return that is important but what is the plan.
This is really hard to do and many people never do this. The reason is that it takes time and it can hurt. If we look at the rational head, what is the plan if you lose your job? If you have no insurance to cover you then have you money to cover this? If you plan to retire at 65 is this part retirement or full retirement, have you considered how much you need and how to get this in the most tax efficient way.
Remember annuity rates are not poor they reflect a changing society and we need to reflect this in our retirement planning.
Understanding the risks
The premise of doing it yourself is often focused on how your portfolio performs, take this example in 1999 one the top performing US funds returned over 100% compared to some more average USfunds returning around 15 – 20%. In reality you would be happy with 15 – 20% but often rational thoughts disappear when you see returns of 100%. In reality the fund which has outperformed carried additional risk and understanding that risk is important.
Having a plan is crucial but understanding how you are going to achieve that is also an important consideration. I would argue that a portfolio of funds (or shares) can spread your risk but also understanding how the funds operate and whether they can capture what you believe to be the next opportunities without putting additional risk in the portfolio.
I will leave you with two thoughts, in the US I believe there is a great deal of potential over the next ten years. I also believe that the companies that will benefit from that are in the small to mid-cap region. I know that that potentially carries additional risk so I will look to understand more about the fund manager and where he invests to see if he is likely to deliver without heightening the risk. In Japan because of the changes I believe a currency hedged Japanese Fund could provide excellent returns over the next 12 months and possible longer however I need to counter that with effectively a currency airbag fund which can protect my portfolio if I get that wrong.
The markets are volatile
I meet a lot of fund managers and talk about how they manage money. One thing that comes across is a cautious optimism and for they believe that there are signs that we are facing a new bull market.
The bull market of the eighties and nineties saw an upward curve with very little volatility but almost everyone is agreed that this time it is different. Cyprus demonstrates the fragility of Europe and North Korea the potential threats of another unwanted conflict. The point is that the markets will be volatile and even if we have a bull market it will be a wobble rather than a straight upward curve.
When the markets wobble we stress to clients to hold their nerve because it is a wobble. Even in 2011 when it wobbled the losses have now been made up. If your philosophy and planning is right then a wobble shouldn’t worry you.
There tends to be a tendency both through the regulators, press and individuals to be risk averse especially at retirement. I have argued for a long time that the world has changed. If we retire at 65 with £100,000 it is not about lasting five years, it is about living for 15 to 20 years. However, because we are at retirement we switch to a risk adverse mind-set. This means we turn to cash and bonds for protection. However, we know that interest rates are not going up anytime soon and that we are paying a premium for yields on bonds. If we put inflation into the mix then this cannot be a good long term investment.
This is a just an example but we all have biases and these need to be challenged as to whether they help or hinder the deliverance of our goals.
I called this blog “I will do anything but I won’t pay 1% for that” for a reason – if you consider how DIY platforms market themselves and how the press report the surge in DIY investments they focus purely on price. They also show the best performing shares and funds. But you don’t pay a financial planner 1% just for investing, it is much more than that it is about providing a rational head, it is about drawing up a plan, it is about consider your tolerance to risk, it is about challenging your biases and ultimately it is about peace of mind.
When you look at it that way then actually a 1% fee doesn’t seem that expensive…….. and the value of advice can be a worth a considerable amount more than what you pay for it.