I’m constantly amazed by the things people are willing to pay others to do for them. Maybe I’m just a bit of a control freak and like to do things myself. And in any case, if you want to pay someone to cut your toenails, or polish your car, who am I to question it?
But there’s one thing I’m not prepared to accept that it’s worth subbing out to another. And that is your financial affairs.
To my mind, this job should be done by you – and probably only you.
And it’s great to see that more and more people are taking control of their own financial affairs. A recent survey by GFK says that of those that have used an independent financial adviser (IFA) in the past, over two thirds now say they’d prefer to dump them and buy investment products directly.
I’m not surprised. Another bit of research out last week from unbiased.co.uk counts the cost of this advice. Its survey of IFA charges suggests on average, you’ll pay some £300 for an IFA to tell you what to put in a ten grand Isa. Or try £1,500 for a bit of advice on how to invest a £50,000 windfall. You can see the full results here.
But it’s not just the IFA costs that are the problem. I’ve got three graver concerns…
Don’t let them botch your finances
The biggest reason people generally don’t like the DIY approach is fear of a bad outcome. Quite right too. I just love watching those TV shows that highlight DIY botches. Sometimes it’s better to leave it to the professionals.
But when it comes to long-term finances, I’m not convinced that the quality of the job is any better, if better at all, just because an adviser is involved.
Though advisers will no doubt be competent and have sat industry exams (In fact, I did them myself many years ago), the fact is, the industry has always taken a rear-view approach to investment. That is, it uses history as a guide on how to invest. And I’ve got a big problem with that!
Yes, the last 30 years have been great for equities and bonds, but does that mean the next 30 years will prove just as profitable? If you look at the long-term history, it suggests not.
On top of the ‘recent history’ bias is something called ‘prospect theory’. This is the idea that humans fear the prospect of a loss more than they embrace the prospect of a gain. IFAs know this, and often present investors with uninspiring investments that don’t make the sort of returns they should, given the price investors pay.
And that price comes in two parts…
Secondary fees really sting
The big issue with paying an adviser to put together a portfolio for you is that the costs don’t stop there.
This year saw the introduction of the Retail Distribution Review (RDR). The idea is that financial advisers can’t now take ongoing kick-back commissions from the funds they’ve put clients into. Clients have to be told about IFA fees in advance. And this has led to a great shake-up of the industry.
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But make no mistake, IFAs are still putting clients into what I consider to be very expensive funds. And frankly, I think they are rarely worth the money. Fund management charges on the ever-popular unit trusts in this country are way over the top.
Because, today, if an investor wants a managed fund, there are loads of cheap alternatives available. Investment trusts are an old favourite of mine (Tim Bennett has a useful tutorial video on these), exchange-traded funds (ETFs) are increasingly popular, and often very cheap. On top of that, there’s a new style of unit trust emerging, based on the US model where annual charges can be a fraction of what’s charged here.
Until we see firm evidence that advisers are putting clients into well-managed, good-value investment funds, then I think most investors will do well to avoid the advisers altogether. I mean, if you are not at all comfortable with the idea of managing your own money, by all means enlist the help of a professional. But for me, it just makes sense to avoid the cost entirely.
And anyway, there’s one last feather in the cap for the DIY approach.
Think about it
When you wash your car yourself, you notice the nicks and scratches that might need a bit of attention. Similarly, managing your own financial affairs offers insights that might otherwise be missed. Is your fund really keeping up with your expectations? Has the fund manager hiked his fees? Can you get a bigger commission rebate by moving to a different fund supermarket?
Sometimes you just can’t beat a hands-on approach.
On top of that, the DIY approach forces you to really think about what you want. Do your own financial projections, don’t rely on what an adviser prophesies in his crystal ball. Can you afford to retire?
Look, I’ve got nothing against professionally managed investments. For most investors, I can see the benefits of a managed fund. It’s just that I question the wisdom of paying others to get you into those funds.
Take just one investment trust, Witan, which has been available for private investors for over 100 years. With just this one fund, bought through a regular stockbroker, you can have a fully diversified, professionally managed retirement pot in just one investment!
For a geographical breakdown of investments, visit Witan’s website.
Over the last ten years, the share price is up 169%, versus its benchmark return of 136%. The fund charges less than 1% in management fees per annum.
Now, if someone’s suddenly inherited £50,000 and wants it tucked away, why on earth would they pay £3,000 to an IFA to tailor an individual portfolio (which will probably have a considerable ongoing cost too), when they can just buy a ready-made, globally diversified fund in one pop?
Still, I’m glad to see real evidence of investors increasingly getting stuck in themselves. The fund management and advisory industry has grown fat raking over the carcasses of unimaginative investors over the years.
Those days are over. Now it’s payback time!
If you are interested in taking control of your own investments then you should sign up to MoneyWeek Basics. It’s a free twice-weekly beginner’s guide to investing. It’ll tell you everything you need to know in plain English.
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