In the re-creation of the financial advice landscape, all sorts of new business models and service propositions are being promoted as the way forward for IFAs. Some will succeed and some will fail. In the light of the industry’s history, it is a safe prediction that the most fashionable solutions are almost certainly among those that will benefit clients least. I rate outsourcing of investment advice as one of these fashionable ideas.
I am probably in a minority of advisers who can remember the advent of financial socialism in the 1970s, when the poor got better investment management than the rich. Unit trusts were created that charged a mere 1 per cent annually for investment management, compared with the much higher fees for worse investment advice provided by blue-blooded merchant banks through their private portfolio management services.
Notoriously, these private client discretionary management services were the place where young trainees in investment management were placed to cut their teeth. Disasters in client portfolios were just part of their learning curve. At the other extreme, old buffer provincial stockbrokers used inside information on local companies from their gang of old buffer mates to convince clients they were on the inside track to big money.
Both these methods of looting and pillaging have largely disappeared from the City scene but advisers who have forgotten the history look doomed to repeat it.
Today’s proponents of outsourcing investment management make two familiar mistakes. One is to say that because today’s markets are more frenetic, managers need to be more active and such activity is beyond the scope of an IFA. This is nonsense. Just read a few comments by Warren Buffett and look at the portfolios of successful managers such as Tom Dobell and Neil Woodford. In fact, turnover is the investor’s enemy and never their friend, unless you happen to be a hedge fund manager or are getting a share of the transaction costs.
The second mistake is to throw away the most useful insight of the past 50 years in investment management – the importance of asset allocation. Diversification is about reduction of risk, not enhancement of returns. Asset allocation is a sound method of reducing risk. If you buy this and believe strategic asset allocation decisions will account for 90 per cent of your clients’ returns, why do they need active discretionary management?
If you do not believe in the fundamental importance of diversification through asset allocation and are going to pass clients’ money to managers who ignore asset allocation boundaries – tactical asset allocation is, after all, just market timing under a fancy label – then why should clients pay you for asset allocation advice?
I suspect the reason that many advisers want to pass the buck on investment is they know they do not have the skills to do it themselves.
hey could develop the skills but they would rather learn how to use pretty pictures to convince clients that simple lessons in cashflow management are worth thousands of pounds in fees. They are not and online tools that do this job will soon be available free of charge on a variety of websites.
Good investment advice will always justify payment of ongoing fees and should be a core proposition for IFAs who want to build the value of their own businesses.
Chris Gilchrist is director of Churchill Investments and editor of Investment Planning