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.
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.
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