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dunstonh

The real question is - how have they got away with it for so long, when any other personal services industry operates in a much more transparent manner.

Because originally, the bulk of it was a retail industry and not an advice industry. The insurance agents sold their products. However, the move to an advice industry by insurance agents created a change along with regulation that decided to phase in the changes. 20 years ago, the bulk of the industry was retail. Today the bulk of it is advice.

You try engaging a lawyer without signing a retainer, paying money up front and getting a full schedule of rates. The connect between the service they offer and the money you pay is there. With the IFA business it has not been. Thankfully this is changing....

Its been available but it was optional. Many IFAs did charge explicitly and have done for many years. Soon, they will all have to but the biggest change is the tied agents. They virtually never charged fees and always promoted their service as "free". The biggest step up is going to be from them.

darkpool

dunstonh wrote: »

Because originally, the bulk of it was a retail industry and not an advice industry.

some of us would argue the IFA industry is still more retail than advice.

jem16

darkpool wrote: »

some of us would argue the IFA industry is still more retail than advice.

If an IFA said white, you would argue black.

However the reality is that never having used an IFA, you cannot argue anything about the IFA industry with any degree of credibility.

DavidLaGuardia

darkpool wrote: »

some of us would argue the IFA industry is still more retail than advice.

I'm not sure that an incentive to promote something was always a bad thing.

Even in the days of the Industrial Branch insurance man or woman collecting money, may families would not have made any provision for savings, life insurance or their retirement without this sales person. If there wasn't an incentive to be rewarded, for the work, it is reasonable to assume that anyone selling insurance would not have perservered with difficult people who would later thank them..

Independent brokers (as they were called before IFAs) became free agents of distribution. Still salesmen, but theoretically able to recommend anyone's product. Some companies like the Equitable Life excluded this distribution channel by having their own highly-paid sales forces. To make sure that there was no commission bias, there was an agreement for the companies to pay the same amount in order that the brokers could not be swayed by commissions. Although this was well intended it was, perhaps understandably, seen as price fixing - a cartel against competition. Arguably, there was still the competition within the pricing and features outside of the brokers payment but it still was anti free market.

However an adviser charges for services, it is right that this should be transparent, but he or she will still have to continue being a sales person to convince that a particular style of advice or service will add value as well as persuade people on a particular route that will not be obvious to them initially.

Other professionals such as lawyers and accountants do not have to do so much 'selling' because they gain their clientele from the requirement of immediate circumstances (facing the law or filing tax returns). Virtually everything an IFA deals with is purely voluntary and in most cases does not have a benefit that is felt immediately.

DavidLaGuardia

browniej wrote: »

Thats odd darkpool. Last time I asked you to help me undertand alpha and beta you gave me an answer which I didnt quite understand. When i asked you for further help you told me to get a book.

Beta is a measurement of how an investment performs against a market (assuming the correct benchmark is chosen which may be questioned). A Beta of 1.0 means its returns have followed the market. A beta of 2.0 indicates its returns (up or down) are twice the magnitude of the market. A Beta of Zero has no correlation to the market and a Beta that is negative has an inverse relationship (If a Beta is minus 1.0 then market goes down by 2%, investment goes up by 2% and vice versa)

Alpha is the measurement of the return that is made over and above the risk taken as measured by the volatility as a reward for active management (arguably volatility is not a perfect measure of risk). So if a fund has returned a high amount but done so by taking a higher risk, the alpha is used to help judge whether it has been worth taking.

What Darkpool is suggesting is that most managers claim to add alpha rarely do so and will ultimately rely on results that are more a matter of random luck than execution. The constant change in funds at the top of tables is proof to this. The stability of some investment managers may warrant no better explanation than a large group of people flipping coins: You can expect some to get ten heads in a row, but it doesn't mean you should expect more than a 50/50 chance on the eleventh throw. Because the cost of trading within the funds in addition to the published costs of the funds adds drag, then active managed funds can statistically be expected to under-perform their markets.

Over time, the overall results have far more to do with asset allocation than individual stock picking within the funds. Many investors could do better with index tracker funds although this inhibits adding value and diversity as well as being a slave to every trade and costs within it to replicate this index. A good portfolio design can add value, manage risk and return, but the scope of using active managers is limited. Although many IFAs promote the latter Good IFAs, portfolios and certain funds can add value and reduce cost.

browniej

DavidLaGuardia wrote: »

Beta is a measurement of how an investment performs against a market (assuming the correct benchmark is chosen which may be questioned). A Beta of 1.0 means its returns have followed the market. A beta of 2.0 indicates its returns (up or down) are twice the magnitude of the market. A Beta of Zero has no correlation to the market and a Beta that is negative has an inverse relationship (If a Beta is minus 1.0 then market goes down by 2%, investment goes up by 2% and vice versa)

Alpha is the measurement of the return that is made over and above the risk taken as measured by the volatility as a reward for active management (arguably volatility is not a perfect measure of risk). So if a fund has returned a high amount but done so by taking a higher risk, the alpha is used to help judge whether it has been worth taking.

David - thanks for your reply. Your explanation confirms that, although darkpool flatters to deceive, his actual knowledge is lacking.

This is what darkpool told me about alpha and beta.

darkpool wrote: »

alpha return is the outperformance that a fund manager delivers by good investment decisions.

beta return is the performance due to the general market moving.

His answer to beta is lacking clarity but when asked for further dteails I was told to get a book! I was given a better explanation by jem16 which seems to agree with your explanation.

jem16 wrote: »

The market itself is given a Beta of 1.0. If a fund has a Beta of 1.5% this would mean that the fund could rise 50% more or less than the market. Beta is therefore a measure of a fund's volatility in relation to the market and is not the actual return of the market. So Beta is not an actual return but an expected return and is constantly changing. It's also subjective as it's a measure of how the fund "should" perform.

Alpha is a measure of the return over or under what it is expected to return relative to its Beta.

So for example if a fund had a 1.5% Beta and the market move was 10%, the fund would have to return 15% to make up for its extra risk. If the fund returned more than 15% it would have a positive Alpha but if it returned less than 15% it would have a negative Alpha.



It's not as straightforward as that unfortunately. R squared also comes into play.

Perhaps these 2 articles might help.

http://www.qfinance.com/asset-management-calculations/alpha-and-beta-values-of-a-security

http://www.tatamutualfund.com/Knowledge-Center/AlphaBeta.swf

DavidLaGuardia wrote: »

What Darkpool is suggesting is that most managers claim to add alpha rarely do so and will ultimately rely on results that are more a matter of random luck than execution.

I know what darkpool is suggesting. However his way of going about it, by suggesting all IFAs are useless, is a major put off for anyone who actually wants to learn. It is also very dangerous for those people who actually need the expertise of an IFA.

DavidLaGuardia wrote: »

Over time, the overall results have far more to do with asset allocation than individual stock picking within the funds. Many investors could do better with index tracker funds although this inhibits adding value and diversity as well as being a slave to every trade and costs within it to replicate this index. A good portfolio design can add value, manage risk and return, but the scope of using active managers is limited. Although many IFAs promote the latter Good IFAs, portfolios and certain funds can add value and reduce cost.

This, unfortunately, is what darkpool seems unable to grasp.

I am pretty sure from previous posts that you are an IFA? Is that correct?

jem16

darkpool wrote: »

darn right, it's like when the house IFAs talk some rubbish about active management delivering alpha returns.

Funnily enough it's you that is trying to prove otherwise rather than them trying to prove anything of the sort. All you have proved though, is your lack of understanding.

how you getting on with your IFA?

Fine. Thank you for asking.

DavidLaGuardia

browniej wrote: »

I know what darkpool is suggesting. However his way of going about it, by suggesting all IFAs are useless, is a major put off for anyone who actually wants to learn. It is also very dangerous for those people who actually need the expertise of an IFA.

Thank you browniej. I agree with this comment and almost all of Jem16's description. The small area I would would disagree with is is the use of the word "expected". Alpha only indicates a past return

For clarity, the area I do aree with Darkpool that the promise to serve up good alpha by a fund is baloney. I see this as a major problem within mainstream funds and IFAs who lap up what they are told by fund providers and what independent research they used is all about analysing past perfromance. Many of these IFAs are clever financial planners, but frequently lacking in the understanding of market fundamentals on the investemnt analysis side. One of the diffculties is that Results and ratings (and awards) relied on are nearly always determined by comparison of 'sectors' (UK Growth, UK Equity Income etc).There is actually so much variance in investment between individual fund sectors. When you screw down to the fundamentals most of the return comes from the specific Betas of the chosen asset ranges within the funds which the active managers fail most of the time to add alpha to after trading costs. The value an IFA can add (appart from financial planning) should come by way of understanding these fundamentals, getting the allocation right then reducing the costs through use of more passive strategies. I think (in truth) a minority of IFAs do this adequately, but I think a greater proportion of DIY investors miss a hell of lot more or risk years of mistakes before they get it right.

darkpool

browniej wrote: »

David - thanks for your reply. Your explanation confirms that, although darkpool flatters to deceive, his actual knowledge is lacking.

This is what darkpool told me about alpha and beta.



His answer to beta is lacking clarity but when asked for further dteails I was told to get a book! I was given a better explanation by jem16 which seems to agree with your explanation.


I know what darkpool is suggesting. However his way of going about it, by suggesting all IFAs are useless, is a major put off for anyone who actually wants to learn. It is also very dangerous for those people who actually need the expertise of an IFA.

This, unfortunately, is what darkpool seems unable to grasp.

I am pretty sure from previous posts that you are an IFA? Is that correct?

Wow!!! Thanks brownieJ! I've never seen my name mentioned so many times in one post.

I'm terribly sorry if you feel my explanation of beta was defficient - I was only trying to help you. It type of says something about you that you feel the need to come and criticise me on another post, on the Easter weekend of all weekends

So what is the term for a Managed Fund price rise which is not due to skill (alpha return)? I always thought it was beta.....

The thing with beta is that it varies with what time period you are looking at. A positive beta does not guarantee that a share will rise because the general market does.

Have you ever considered a fund of funds? we all know fund managers try their best to beat the markets? well how much sense does it make to employ a fund manager to research all the other fund managers/ UTs and pick the best ones?

You should put everything you own into a fund of funds, then tell us how you are getting on in twenty years.

darkpool

DavidLaGuardia wrote: »

For clarity, the area I do aree with Darkpool that the promise to serve up good alpha by a fund is baloney. I see this as a major problem within mainstream funds and IFAs who lap up what they are told by fund providers and what independent research they used is all about analysing past perfromance.

I broadly agree with what you said there. But I'd imagine that most IFAs know in their heart of hearts that active fund management doesn't deliver alpha returns. Let's be honest, the academic research that shows active management doesn't work is fairly overwhelming. The "research" that shows active management delivers alpha is best described as feeble....