Investing without FA

50Twuncle

OK - The most important question is what financial responsibility an IFA bears - should an investment that they have advised on - does not gain as much (or loses) money ?
As far as I have experienced - nothing - when I started in the game (at the height of the crisis) - I was given all of the gunfh with expected gains of 5-6 % pa - and ended up with (at the most) 2% pa - fair enough that's better than any savings account - but had the conditions been even worse - it would have been myself that had to take the loss - NOT the IFA - He receives his percentage every month, no matter what !!

dunstonh

OK - The most important question is what financial responsibility an IFA bears - should an investment that they have advised on - does not gain as much (or loses) money ?

None whatsoever. That is not something the IFA is there to do. So, making the IFA responsible for it would be silly. The IFA is there to ensure suitability and carry out due diligence and research to give you what is right for you.

As far as I have experienced - nothing - when I started in the game (at the height of the crisis) - I was given all of the gunfh with expected gains of 5-6 % pa - and ended up with (at the most) 2% pa - fair enough that's better than any savings account - but had the conditions been even worse - it would have been myself that had to take the loss - NOT the IFA - He receives his percentage every month, no matter what !!

And had the conditions been better you would have got more. Investment returns are always unknown. You never know what they are going to be. You get an idea of the long term average but if you have only invested for a short term period, then you will not likely be near that long term average. You will either be above it, if there has only been good years or below it, if there has been bad years. You have had a particularly bad period in there. Hence why you are lower. As time goes on, you should get closer to the long term average.

Why are you not having these discussions with the IFA? It is what they are there for and what you pay for. I suspect your IFA, like most, has the information they can give you that explains investments as it appears you knowledge is a little bit lighter than desirable at the moment. So, it should do you some benefit to speak with them.

bigfreddiel

How does an IFA ensure an investment is suitable?
Cheers fj

bigfreddiel

bigfreddiel wrote: »

How does an IFA ensure an investment is suitable?
Cheers fj

Seems like this is too hard to answer.

Cheers fj

bowlhead99

Presumably the answer is along the lines of "... The same as the way any type of consultant ensures that the solution they create is suitable for the customer".

By asking a bunch of questions about the customer's needs, wants and goals, and discussing what the priorities are and what sort of outcomes would reflect a good solution, or a "not ideal but OK" solution, and what would be a failure.

As with any type of personal service or consulting, a problem can be that the customer doesn't fully understand his options and/or decides he would prefer something else after the solution has been put in place or the product has been developed. So, understanding the client needs and perhaps educating them a little on what might be realistic expectations for certain approaches, would seem to be sensible.

AnotherJoe

What bowl head said, this can be done with many medical conditions nowadays, for most conditions there are only a certain number of choices of treatment and many studies show that algorithms outperform doctors in most cases even if the doctor is still needed to understand and guide the initial input (since the patient may not be competent to understand the questions or symptoms, amd this would be similar for finance). If that personal level of advice can be automated then investment advice certainly can.

Whether anyone yet has derived the categorisations or algorithms that will outperform most IFAs is hard to know but IMO is only a matter of time because cutting cost is a major part of investment performance and the right automated setup should be able to do exactly that given large enough client bases.

TheTracker

AnotherJoe wrote: »

Whether anyone yet has derived the categorisations or algorithms that will outperform most IFAs is hard to know but IMO is only a matter of time because cutting cost is a major part of investment performance and the right automated setup should be able to do exactly that given large enough client bases.

On the contrary.

No one has yet shown through peer reviewed research that IFAs are outperformers of 'investment performance' in the first place. If you are using an IFA to increase investment performance you are in the wrong game. You have issued the challenge in the wrong direction.

IFAs choose suitable investments in a three step process.

1. Ascertaining the risk profile and personal needs and characteristics of a person. This is largely algorithmic, but requires a degree of personal attention that a web site is not yet able to reach. I consider it similar to the function a GP provides, although with far less skill. My view is IFAs provide a good service here for many.

2. Matching the outputs of #1 with an asset allocation. More likely to be replaced by an algorithm, but still in an immature place in the consumer market, though high in academia/industry. Hence we see people talking about 60:40 etc. It will only mature when we can standardise number 1. My view is the IFA provides rapidly decreasing value here.

3. Matching the outputs of 2 with a set of suitable investments. An IFA provides no value here, and I would argue negative value. Most have collectively fooled themselves that they or their firms have some special ability to select funds that match an asset allocation that beat the market, after fees. Complete nonsense. The evolution of number 2 will continue to deplete the consumers confidence in number 3, there should be very few personal circumstances that mean a well balanced basket of passive funds are not the most suitable investment for the vast majority of people. This may be an important step in future IFA services, but a straightforward part, and a very low fee part.

Linton

TheTracker wrote: »

No one has yet shown through peer reviewed research that IFAs are outperformers of 'investment performance' in the first place. If you are using an IFA to increase investment performance you are in the wrong game. You have issued the challenge in the wrong direction.

IFAs choose suitable investments in a three step process.

1. Ascertaining the risk profile and personal needs and characteristics of a person. This is largely algorithmic, but requires a degree of personal attention that a web site is not yet able to reach. I consider it similar to the function a GP provides, although with far less skill. My view is IFAs provide a good service here for many.

2. Matching the outputs of #1 with an asset allocation. More likely to be replaced by an algorithm, but still in an immature place in the consumer market, though high in academia/industry. Hence we see people talking about 60:40 etc. It will only mature when we can standardise number 1. My view is the IFA provides rapidly decreasing value here.

3. Matching the outputs of 2 with a set of suitable investments. An IFA provides no value here, and I would argue negative value. Most have collectively fooled themselves that they or their firms have some special ability to select funds that match an asset allocation that beat the market, after fees. Complete nonsense. The evolution of number 2 will continue to deplete the consumers confidence in number 3, there should be very few personal circumstances that mean a well balanced basket of passive funds are not the most suitable investment for the vast majority of people. This may be an important step in future IFA services, but a straightforward part, and a very low fee part.

I agree completely that you dont go to an IFA to choose those funds which will provide the best returns - no-one can do much better than random for a given detailed asset allocation. It's the strategy and asset allocation which are important.

Risk profile and personal needs arent simply a matter of assigning a number. There are complex issues in coordinating things like multiple time frames, balancing inheritance vs spend now, tax, ongoing income vs capital growth. If its simply a matter of risk in a 30 year pension fine, but real life financial planning is very far from algorithmic. Even risk isnt that simple. In my own case I am pretty risk averse when meeting my basic retirement requirements and very accepting of risk for anything beyond that.

Somewhere between 1 and 2 you need to define a strategy. Again that may be simple or it could be complex.

I do not believe that "a well balanced basket of passive funds" is an optimal decision as getting what I consider to be "well balanced" is difficult if not impossible with passive funds. However for the "lazy investor" who is afraid of doing something silly then your well balanced basket would be a reasonable compromise.

It is interesting that your section 3 is by far the longest when perhaps we would both agree it is the least important. People should focus on 1, 1a (strategy) and 2. Precisely where an IFA can provide most help to a novice investor.

TheTracker

Linton wrote: »

It is interesting that your section 3 is by far the longest when perhaps we would both agree it is the least important. People should focus on 1, 1a (strategy) and 2. Precisely where an IFA can provide most help to a novice investor.

Yes, I would agree.

bigfreddiel

bowlhead99 wrote: »

Presumably the answer is along the lines of "... The same as the way any type of consultant ensures that the solution they create is suitable for the customer".

By asking a bunch of questions about the customer's needs, wants and goals, and discussing what the priorities are and what sort of outcomes would reflect a good solution, or a "not ideal but OK" solution, and what would be a failure.

As with any type of personal service or consulting, a problem can be that the customer doesn't fully understand his options and/or decides he would prefer something else after the solution has been put in place or the product has been developed. So, understanding the client needs and perhaps educating them a little on what might be realistic expectations for certain approaches, would seem to be sensible.

Is that all. Not too complicated by the looks of it.

Definition of a consultant. Someone who uses your own watch to tell you the time and then charges you for the privilege.

fj