Not to come over all Jeremy Clarkson, but speeding fines irritate me. There are plenty of other dangerous drivers who get away with lethal behaviour. But speeding is easy to measure, dangerous driving less so.
What’s this got to do with investment? Well, it illustrates a problem with financial advisers because, like the police, I fear they focus too much on what they can measure. In reports to clients, emphasis is placed on how much money the client has made. But this, surprisingly, is not what you’re paying an adviser for.
‘Not everything that can be counted counts and not everything that counts can be counted.’ That’s a great quote from American sociologist William Bruce Cameron. Just because things can be measured — like investment returns or car speeds — doesn’t mean they are important. And factors that are difficult to measure, such as danger, are often ignored but shouldn’t be.
So why pay a financial adviser for help? What value or so-called ‘adviser alpha’ does an Independent Financial Adviser offer? Most advisers exhibit little skill in picking top-performing funds or timing market rallies. Consequently this is not a reason to pay for their advice. Tax mitigation using Isas, pensions and financial planning is clearly of benefit to clients, but that represents only part of the reason to use an IFA.
I think the most important benefit from having an adviser is to save the financially naive from themselves. If you’re a doctor or a barrister, why would you know about finance? Most novice investors make the same mistakes over and over again. And in my opinion it’s the adviser’s job to stop that happening.
The US low-cost fund manager Vanguard recently published research that showed the main way an adviser adds value is by ‘being an effective behavioural coach. Helping clients maintain a long-term perspective and a disciplined approach is arguably one of the most important elements of financial advice.’
Jonathan Gunby, chief development officer at Transact, a leading platform for advisers in the UK, agrees: he calls it ‘behavioural alpha’ — preventing non-expert investors making mistakes such as selling a market at the bottom or buying it at the top. The S&P500 is now trading at 2,100 compared with a low just below 700 in 2009, yet many investors sold after the big falls, when they should have been buying. In the 1999 dotcom boom, investors piled into small tech stocks, many of which have since gone bust. They also tend to buy the most recent top-performing fund just as its performance is peaking, and sell funds that are performing badly just as they start to recover.
Investors are also too worried about stock-market swings. Being 44, I’m at least 20 years from retirement, so volatility is irrelevant to me. I know I can’t predict what the market will do each year but I do know that long term, shares deliver the best returns. So no matter what, I keep putting money away every month. But some investors don’t. Volatility is scary, but for long-term savings — and most are — such short-term fears should be ignored.
An IFA’s prime purpose, then, is to keep clients invested and teach us not to chase short-term market movements, because very few do so profitably. The key to successful investing is to build savings over decades, benefitting from compounding returns. Advisers add value by keeping clients disciplined and focused on the long-term goal.
And that’s why I compare an IFA’s role to that of a personal trainer or a Weightwatchers meeting. Losing weight and keeping fit requires the same self-discipline as saving. The instant gratification of chocolate in front of the television needs to be resisted for long-term benefit. It’s the same with money: too often I’m tempted by a pair of shoes when I should be putting cash away for my kids and my retirement.
We pay IFAs to keep us on the financial straight and narrow and save us from our own failings. They should draw up a plan which forces us to save each month. They should stop us over-reacting emotionally to investment, as we might resort to a takeaway curry and a bottle of wine after a stressful day. Both losing weight and growing savings require willpower and self-discipline: I just need to find an adviser who will stop me buying shoes.