Professional Finance people no better than amateurs

darkpool

Reactor wrote: »

In terms of performance an amateur can perform better than a professional, but I wouldn't bet on it.

but i think the odds strongly favour a reasonable intelligent amateur over any IFA.

The long term stockmarket growth, in real terms, is circa 5%.

An amateur investor buying trackers/ direct holdings is likely to get near enough that 5% annual growth.

Someone going to an IFA will be advised to buy Unit Trusts etc. The annual charges for them are likely to be circa 2.5%. So the growth left over for the investor will be 2.5%.

So an amateur investor investing 100k will have 265k in twenty years time. An investor going to an IFA will have 164k. That's quite a difference.........

Personally I'd rather have that extra 100k in my pocket...

psychic_teabag

The long term average growth of the stockmarket may well be 5%. But us mortals only get to invest over a window of time, and we might get a period when it averages 10%, or 1%. A balanced portfolio gives up some growth to reduce volatility and therefore risk of shortfall. If you're not investing for anything specific, just as good a return as you can get, then going all out on equities might be fine. But that's not what everyone is investing for. And even if you are going for broke, you can't have the 5% for the whole twenty years : you need to start derisking as you approach the day you need the money.

My understanding is that what an IFA is selling you is a balanced portfolio.

psychic_teabag

HelpWhereIcan wrote: »

I propose to give a general outline of a case I am looking at – no names, some details changed to protect those involved frombeing identified and me falling foul of DPA etc.

I will answer with whatever information you ask of me (where reasonable and possible) to help you devise your solution for theclient.

I would like to see what an ‘amateur’ would suggest if they were asked by the same client for advice.

To me, the big difference between the amateur and the professional is that the amateur researches the things of interest to their particular needs, whereas the professional advisor needs to know about all sorts of different areas. E.g. I know very little about annuities because, as far as I know, they're not something I'm going to have to worry about for now. I don't worry about capital gains tax or (too much about) tax loopholes because they don't currently affect me. A risk is of course is that there are things I should be doing that I'm not even aware are (potential) problems.

So this challenge may be flawed because an amateur's interests won't exactly overlap someone else's exact case.

darkpool

psychic_teabag wrote: »

The long term average growth of the stockmarket may well be 5%. But us mortals only get to invest over a window of time, and we might get a period when it averages 10%, or 1%. A balanced portfolio gives up some growth to reduce volatility and therefore risk of shortfall. If you're not investing for anything specific, just as good a return as you can get, then going all out on equities might be fine. But that's not what everyone is investing for. And even if you are going for broke, you can't have the 5% for the whole twenty years : you need to start derisking as you approach the day you need the money.

My understanding is that what an IFA is selling you is a balanced portfolio.

i don't think anyone is suggesting that the stockmarket delivers a steady 5% a year. but the fact remains you are likely to make more money if the annual charges you pay are low.

sooooo it looks likely a portfolio run by an amateur will outperform a portfolio run by an IFA.....

HelpWhereIcan

psychic_teabag wrote: »

To me, the big difference between the amateur and the professional is that the amateur researches the things of interest to their particular needs, whereas the professional advisor needs to know about all sorts of different areas. E.g. I know very little about annuities because, as far as I know, they're not something I'm going to have to worry about for now. I don't worry about capital gains tax or (too much about) tax loopholes because they don't currently affect me. A risk is of course is that there are things I should be doing that I'm not even aware are (potential) problems.

Surely this, and your last post, help to illustrate the value an IFA should be able to add.

Making full use of your CGT allowance each year, moving assets into the most appropriate wrapper, asset allocation, rebalancing etc are the bread and butter of what most IFAs do.

A decent IFA will also be able to see the pitfalls of any current investment 'fad' as well as the upsides. They should also be able to take into account any market, tax or legislation chanegs and should temper their advice (and their client's expectations) as a result.

I actually welcome someone who has done their research and knows what they are talking about. Being challenging is one thing, being dismissive of someone's skills - when you may not even know what they are - is quite another.

You seem to get that.

psychic_teabag wrote: »

So this challenge may be flawed because an amateur's interests won't exactly overlap someone else's exact case.

Would that not be the point? An amateur may be able to choose for themselves and may be able to 'best' the professional in some cases; but can they do it consistently for different types of people in different circumstances simply by using the same wrappers and funds for everyone?

If they can the 'man in the pub' or a 'knowledgeable friend' would be able to save most people the cost of using an IFA by recommending Trackers and Gold Sovereigns etc because

darkpool wrote: »

but what you do is get the clients risk tolerance on a 10 point scale and then use a "model" portfolio provided by another company?

so your "advice" is basically a copy/paste excercise?

information which is available to anyone who looks and

DiggerUK wrote: »

with a bit of encouragement off modern communications channels, such as here on MSE, the nervous investor can take control of their own finances, for a lot less than those who take no responsibilty for their advice.
What should turn everybody away, from any sort of financial adviser, is the total lack of liabilty if the advice is bad.
..._

If not, that would imply there are tax, information and other issues which mean most people are better getting personalised advice because each person's situation is slightly different.

Things which mean the FSA is correct increasing the level to which an adviser has qualified before they can give advice because the landscape is forever changing and something people should have the intellectual interest and capacity to keep up with.

After all, a cut and paste exercise should not require any special skills or qualifications ... just the ability to pay for and use the tools from which you cut and paste.

psychic_teabag

HelpWhereIcan wrote: »

Would that not be the point? An amateur may be able to choose for themselves and may be able to 'best' the professional in some cases; but can they do it consistently for different types of people in different circumstances simply by using the same wrappers and funds for everyone?

I guess there are two different cases to consider then

1. how good are the decisions an amateur makes for themselves ?
2. should amateurs be giving advice to their friends down the pub ?

Or maybe there is a third case : does the "wisdom of the crowd" on a site such as this end up with reasonable advice ? Rather than pitting one amateur against a professional, perhaps it would be interesting to see what the forum as a whole comes up with. Though I guess the IFA's who generously give their time on here might exclude themselves from such an experiment, and there may be a difficulty in deciding what is the actual verdict of the crowd, with some people shouting "gold", others shouting "trackers", etc.

darkpool

HelpWhereIcan wrote: »

I actually welcome someone who has done their research and knows what they are talking about. Being challenging is one thing, being dismissive of someone's skills - when you may not even know what they are - is quite another.

So if someone walked into your office and said "there has been ample research that says stockmarkets deliver circa 5% growth in real terms a year, the investments you propose I make have annual fees of 2.5%. Does it really make sense for me to give away half of my investment growth each year?"

There you go, I think that's a challenging question you will enjoy answering.

As an added incentive, if you give a really good answer I might get my family to move our millions to an IFA.

gadgetmind

darkpool wrote: »

There you go, I think that's a challenging question you will enjoy answering.

I asked my old IFA this question, albeit phrased in a less confrontational way.

His response was that either I had faith in stock picking and market timing, and was prepared to pay for this and his claimed ability to dynamically choose the right stock pickers and market timers, or ... not.

I went for not.

MrMalkin

It's just a fact of life that the financial services industry exists purely to take a percentage of their customers wealth. Whether or not it is worth paying that percentage depends on the customer, the advisor, and the advice. It's up to the industry to extract the maximum of milk, with the minimum of moo from the customer.

In general terms I think confidence in the financial services industry has collapsed, particularly amongst your average retail-type investor, therefore the amount of mooing has increased considerably. It might not be particularly fair to some IFAs and other professionals, but they're going to have to regain that confidence, either by taking less milk or, to stretch the analogy to breaking point, suck on the teat a bit less greedily.

Personally I think there is a yawning gap in the market which IFAs should seriously look at entering, and that's general education in finances. How many kids grow up with no understanding of interest rates or mortgages or even basic budgeting? Why is this acceptable, especially as we head into a period of poor growth and lack of opportunity? Imagine how much respect the industry would earn if it took it upon itself to educate the next generation to better prepare themselves for this environment.

Surely some enterprising financial types have the intelligence, the business savvy, and the integrity to attempt such a thing?

BobQ

HelpWhereIcan wrote: »

OK. part.

I propose to give a general outline of a case I am looking at – no names, some details changed to protect those involved frombeing identified and me falling foul of DPA etc.

I would like to see what an ‘amateur’ would suggest if they were asked by the same client for advice.

I would suggest that anyone who posts an answer accepts the following stipulations:

?

A fair question for those amateurs who give financial advice to others. But most amateurs only advise themselves not others.

The question an amateur has to ask is whether its good value to get advice or better to do it themselves; and unless they compare their experience with investing a particular sum with the experience of using an IFA with the same investment over the same period they will never know.