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Chris Gilchrist: Financial planners need to take investment more seriously

Back in the nineties and the noughties I regularly met advisers who boasted about how their clients’ portfolios were performing.

Usually, I could predict what was in those portfolios: recent high-profile fund launches or those that had topped the performance tables for a few consecutive months. Coincidentally, such funds had often had good coverage in the press, since financial journalists would have been on a jolly (aka research trip) to Europe, New York or even Japan to ascertain the merits of the investment.

Most of the time, those portfolios would have scored between 7 and 9 on a one to 10 risk scale even though they were created for investors who, if they had been risk-profiled (which mostly they were not), would have come out as “balanced”.

Until the 2000-2003 bear market, nobody worried much about downturns. The clients were not about to draw a lot from their portfolios. So most of the time advisers got away with poor advice: they routinely recommended investments with far too high a degree of risk and were bailed out by the markets.

Even after a salutary dunking in the bear market, many advisers stayed on the same path. They regarded going to one or two fund manager roadshows as a sufficient basis for creating portfolios. I still come across people like this today.

Should IFAs get discretionary permissions?

Regrettably, the easy-money markets since 2009 have lulled many into thinking investment is easy. That is an illusion which carries a big cost, though that cost is usually deferred until the next crash or crisis.

Taking investment seriously means taking time to think about what is going on. I cannot think of a single “great investor” who did not or does not read a lot. There is certainly no way you can be a successful contrarian investor unless you are better informed than almost everyone else. Did you buy mining/resource funds last year?

Advisers who recognise the necessity of doing investment properly have two options: outsource or do it themselves.

Outsourcing is not an easy option: you need to do proper research on the people you choose, match your profiling systems and monitor their performance against a relevant peer group. I would expect many of the boutique discretionary fund managers soliciting advisers’ business to be taken over within a few years, so you need to be prepared to deal with that or enjoy waltzing with a gorilla.

Doing investment properly means setting up an investment committee with suitable terms of reference, appointing external members with relevant knowledge and experience, and establishing robust, auditable procedures for decision making. I guess about a tenth of adviser firms are actually capable of this.

Do one-man band IFAs have a future?

Perhaps another tenth are capable of buying an off-the-shelf investment service that delivers what looks like a serious investment proposition. These numbers are low because no solution works unless it is delivered consistently by each adviser in the firm, and that is what many firms are unable or unwilling to do.

It depresses me when advisers say: “But what we do as financial planners is much more important than the investments we use.” Not when clients lose money, it’s not.

Investment is the core of financial planning. Cashflow projections and stochastics do not solve the fundamental uncertainties of investing, which you have to confront and deal with on their own terms. If you do not want to do that, sell your business and let someone else do a better job of it.

Chris Gilchrist is director of Fiveways Financial Planning



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There are 16 comments at the moment, we would love to hear your opinion too.

  1. Chris – Bless your heart. At last!

    So many so called ‘planners’ (I never understood why they are never satisfied with the label IFA. Are they ashamed of it?)avoid the nitty-gritty and hide behind lifetime cash flows (so nothing changes. No illness, marriage, divorce, death, children, unemployment – etc – making much of this expensive charged for exercise pretty worthless. Cash flow for the next 5 years is probably more useful, provided it is annually reviewed and doesn’t cost the client a fortune).

    And they also tend mess around with the touchy feely Kinder stuff instead of sticking to the real job of getting to grips with investments and not just hiving it off to a DFM and charging the poor old client for the privilege.

    • The reason many people call themselves “planners” Harry is to differentiate themselves from those who just provide advice at specific points in time.

      Your comments tend to suggest you’re much like many other “advisers” I’ve met. Your used to doing things a certain way and that whilst you might have looked a little at things like forecasting and long term planning, you’ve gone in with preconceptions and haven’t actually understood what the point is, or that you use the tool to model all those things that you mention.

      Well those that use it properly do anyway.

      As for getting to grips with investment. My question to you would be as follows? Do you think your an expert on investment management? Asset allocation? Monitoring the market etc?

      Or are you a financial adviser? There are not enough hours in the day for you to be an expert at both things.

      What you might be, is an expert at picking out the right people to manage your clients money on a day to day basis.

      Most advisers are good at people skills, it’s almost a prerequesite of the job. However most people that have really good people skills do not have really good technical skills.

      • I’m afraid my response may well make me sound a conceited self-satisfied big head. (And honestly I’m not). I also am well aware of all the parameters you enumerate, being a CFP and Chartered and still keeping up with my CPD.

        But will all due sincerity and modesty I can tell you that I manage some of my own money in the same way as I used to manage clients money – with no little success. Indeed I also use a stockbroker for some of my money and I do manage to keep up if not sometimes outperform him – and we both do better than the indices.

        Apart from investments there are pensions, tax planning and life assurance. I managed to keep abreast of these (tax planning always in conjunction with the clients’ accountants) and had a department doing General Insurance as well. Not bad for a sole trader. But then a 70 hour week helped as well as careful choice of selected clients.

        I never found ‘people skills’ that vital. Sure I got on with my clients, but advice was on a take it or leave it basis. I was not in the practice of cajoling clients. Invariably they were intelligent enough to take the information (advice). If not they still got charged the fee. All clients (without exception) came from referrals. Professional connections in the main and some from existing clients. Indeed I still get referrals for new clients for my current occupation as an unregulated consultant providing generic advice and guidance. No small portion of this relates to clients asking what they should be asking their IFAs and what they should be looking out for! Incredibly!

  2. Robert Milligan 3rd October 2017 at 4:14 pm

    Chris, What a article, so succinctly put, with out doubt the most correct statement this paper has published in a long time, Well Done Sir, I have listened to many an adviser working from his shed tell me they are single practitioners and do all their own asset allocation, I have held my head in shame every time I hear them,

  3. peter mulholland 3rd October 2017 at 8:45 pm

    Not so sure a committee will do any better job.
    Monkey and a dart board might due better haha
    Good article in Bloomberg today about how over the last ten years average hedge fund (presumably run by a comiittee and ‘experts’) has consistently underperformed S&P500. Underperformed by a huge margin.
    I read lots and study and that’s the frustrating thing – it does not seem to make the slightest difference.
    I leave certain portfolios and they do just fine over time.
    Monkeys and dart boards.
    BTW your article was pretty condescending in its approach – left a bad taste.

  4. Whilst you have some good points Chris, your also being fairly patronising and seem to have little comprehension of the difference between “planning” and advice.

    However I do absolutely agree that no financial adviser is an expert at asset management or investment, they simply don’t spend enough time on research to be able to be.

  5. Yep, patronising indeed.

  6. To everyone who’s feeling patronised or otherwise aggrieved about the tone and content of this article:

    Read the last paragraph of this article again. Out loud. Into a mirror.

  7. Financial planners are good at promoting themselves and the value of their service. But if they outsource investment, they’re also promoting someone else’s product or service. As I said, choosing and managing your outsourced investment is not easy: if you think it is, you haven’t got it.
    As Mr Buffett says, it’s better to be approximately right than precisely wrong.

  8. Anthony John Etkind 4th October 2017 at 1:41 pm

    Chris, questions arising from your article: 1. How can “financial plannners” justify charging from 0.5% to 1% p.a. for running a cashflow spreadsheet and supposedly monitoring a DFM? 2. How can clients afford to pay the annual charges of financial planner + DFM + custodians + fund managers and still make a reasonable return? 3. How useful are cashflow spreadsheets for the retired in drawdown, when sequence risk and the risk of needing care are the key client concerns? 4. On the other hand how can IFAs who understand investment possibly provide general financial planning advice and investment advice for clients in a consistent way that will comply with FCA requirements? 5. If the answer to all the above is to use ETFs, how will that pan out when we have the next serious downturn in the market? I don’t claim to have the answers to these questions, but maybe they should be debated rather more frequently.

    • chris gilchrist 4th October 2017 at 2:29 pm

      Thank you! It’s always nice to be given ideas for the next column…

    • “If the answer to all the above is to use ETFs, how will that pan out when we have the next serious downturn in the market?”

      Or, if the answer to all the above is to use high cost active funds, how will that pan out when we have the next serious downturn in the market?

      Perhaps we should include that in the debate too?

  9. The whole point of planning is to help educate clients on what happens in markets from time to time and guide them through it. Whether you source in house/outsource/buy the market or whatever, the market will still do what the market does, nobody is immune.

    A planner still earns his/her money when a client looses money, some would argue it is the most crucial point of the planning process. I disagree with you, I think planners firmly believe that their investment proposition is central to their planning proposition, it goes hand in hand.

  10. Anthony John Etkind 4th October 2017 at 3:39 pm

    Rob, am happy to include that in the debate. And let’s keep that debate friendly. We need to add a further question: if active managers set the prices that ETFs take, what happens when/if ETFs dominate and so the majority take the prices that are set by the minority?

    • ETF’s trade actively too and human nature dictates that there will always be all sorts of traders attempting to seek out mis-pricing. Not convinced market-cap index domination will ever become reality.

  11. “Taking investment seriously means taking time to think about what is going on. I cannot think of a single “great investor” who did not or does not read a lot. There is certainly no way you can be a successful contrarian investor unless you are better informed than almost everyone else.”

    Yep, just read a lot, you IFAs, and you’ll have an edge over thousands of traders, and millions of algorithims.

    “It depresses me when advisers say: “But what we do as financial planners is much more important than the investments we use.” Not when clients lose money, it’s not.”

    If that depresses you, perhaps you are the one who should be selling your business, and letting others make a better fist of it. The only clients that “lose” money are those that sell into a falling market eg those without a financial plan.

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