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Tony Byrne: Why money management techniques don’t work

Recent years have seen an increasing movement among financial planners towards centralised investment propositions, asset allocation, passive funds and cashflow planning. Clients’ attitudes to investment risk and capacity for loss have become essential to manage, too. All of this is driven by the FCA, of course.

Such money management techniques have made financial planners more professional and clients’ money safer. But is it resulting in better investment returns? I think not.

The problem is, we have all been getting so obsessed with reducing risk over the past few years that clients’ investment returns have been disappointing. And prospects do not look any more promising for the foreseeable future.

Asset allocation is just not cutting it any more. Bonds are likely to produce zero or near zero total returns over the next 10 years, so why invest any money into them?

Cash funds are yielding zero or negative returns while interest rates are so low. Rates may well rise 1 or 2 per cent in the future but that will still mean returns on cash being abysmally low for years to come.

Commercial property is also going through a sea change, with demand for offices to rent on a long-term downward trend considering modern workers are increasingly doing their job on the move with their devices instead. As the UK becomes more of a service sector economy, the demand for industrial buildings is likely to fall, too.

As for equities, we suffered a large fall in world stockmarkets of between 10 and 15 per cent in the last quarter of 2018. But although markets will always rise and fall in value, the long-term trend is upwards.

In the US, share prices have risen by an average of 6.7 per cent a year over the past 200, 100, 50 and 25 years. The return from equities far exceeded the returns from cash and fixed interest. So why should it be different over the next 100 years?

Five years ago, I resumed a relationship with a client I had lost touch with for about 20 years. He and his wife had kept all the equity unit trusts I had recommended to them originally. I was staggered to find that many had risen by 300 to 400 per cent over that time with no annual reviews.

If we had reviewed their investments annually using modern adviser money management techniques, would their returns have been higher? I doubt it.

All advisers know instinctively that, faced with an investment term of 10 years or more, it makes much more sense to simply invest 100 per cent into equities. Clearly there would need to be a range of funds in order to reduce risk.

Under current rules, such a strategy would require the client to be a very high-risk investor and to have sufficient capacity for loss. But at least it would be likely to exceed returns from any other approach recommended by an adviser today.

Can you see it going down well with the regulator, though? No, advisers are so constrained under the current regulations, they cannot offer such a bold approach. This is why current regulations simply do not work.

Tony Byrne is managing director at Wealth and Tax Management

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