IFA or DIY - any thoughts appreciated

fred246

Some active investors do beat the market. Some active investors do spectacularly badly. You will always get an active investor saying "I did better than that." I remember when people put lots of money in Woodford's funds and they collapsed they got so much stick for it on these forums. I imagine the losers will keep quiet. There will always be someone ready to criticize their choice of diamond geezer. The winners will come on the forum "why has my choice of fund been so good?"

BritishInvestor

fred246 said:

Vanguard are too small a company to be able to afford an IFA to construct portfolios for them. IFAs can always show you a portfolio that did better than a passive fund. Whether any of their customer's ever had the portfolio is something the customer will never know. IFAs always say it's not their job to produce the highest investment returns but whenever someone suggests investing in passive funds an IFA always says "I can beat that".

Vanguard has an advisory offering in the states (restricted as they only offer their own funds)
https://investor.vanguard.com/financial-advisor/financial-advice/personal-advisor-services
which may come over here at some point
https://citywire.co.uk/funds-insider/news/vanguard-plans-uk-investment-advice-service/a1311374
Most IFAs I know (who tend to follow a passive approach) incorporate some Vanguard in their portfolios (Dimensional is also a popular choice https://eu.dimensional.com/en)

BritishInvestor

TBC15 said:

BritishInvestor said:

dunstonh said:

BritishInvestor said:

enthusiasticsaver said:

Just looking at the charges is a bit like comparing apples and pears and having invested with VLS60 for about 6 years I moved to an IFA last year and was under no illusion that the charges would be higher.  The performance of the VLS60 though over the last 12 months is 4.4% whereas the portfolio under my IFA has returned  almost 10% with a similar asset allocation of 60% equities and 40% fixed term.  A few of the funds he chose have performed very well over the last few months though so that has skewed the results.  The charges are higher but the return is too so overall it has performed better than in a passive multi asset fund.  I am only speaking from a personal point of view though and of course you could get investors with other IFAs producing completely different results. You cannot really only look at charges in isolation. 

An IFA (or anyone else for that matter) is unlikely to significantly outperform something like the LS range (or similar multi-asset low cost offerings) over the long term. 

That is easier than you seem to think.

Given that the vast, vast majority of people that I see attempt it (on a professional and individual level), I'd be keen to understand how. Edges are extraordinarily hard to come by in the market.

So if we accept active investors can’t beat the market and passive investments give superior returns why do these people continually accept the loses, some sort of masochism? Year in year out.

From the book link above:
1. Lack of knowledge
https://buckinghamadvisor.com/why-investors-defy-the-evidence-and-continue-to-play-the-loser/
"Most Americans, having taken a biology course in high school, know more about amoebas than they do about investing"
2. The belief that hard work should provide superior results. 
https://www.etf.com/sections/index-investor-corner/swedroe-doing-nothing-best-option?nopaging=1
"‘Diligence, hard work, research, and intelligence just have to pay off in superior results. How can no management be better than professional management?"
3. Belief that their chosen fund manager is endowed with better information than the rest of the market
https://www.etf.com/sections/index-investor-corner/swedroe-doing-nothing-best-option/page/0/1
"individual investors and money managers persist in their belief that they are endowed with more and better information than others and that they can profit by picking stocks"
4. Lake Wobegon effect - people think they can be better than the average
https://www.evidenceinvestor.com/tag/lake-wobegon-effect/
5. To be able to take credit when their chosen fund manager outperforms (and blame him when they don't)
6. The unwillingness to invest time and effort to understand investing - see #1
There's lots more - definitely worth a read

AnotherJoe

TBC15 said:

BritishInvestor said:

dunstonh said:

BritishInvestor said:

enthusiasticsaver said:

Just looking at the charges is a bit like comparing apples and pears and having invested with VLS60 for about 6 years I moved to an IFA last year and was under no illusion that the charges would be higher.  The performance of the VLS60 though over the last 12 months is 4.4% whereas the portfolio under my IFA has returned  almost 10% with a similar asset allocation of 60% equities and 40% fixed term.  A few of the funds he chose have performed very well over the last few months though so that has skewed the results.  The charges are higher but the return is too so overall it has performed better than in a passive multi asset fund.  I am only speaking from a personal point of view though and of course you could get investors with other IFAs producing completely different results. You cannot really only look at charges in isolation. 

An IFA (or anyone else for that matter) is unlikely to significantly outperform something like the LS range (or similar multi-asset low cost offerings) over the long term. 

That is easier than you seem to think.

Given that the vast, vast majority of people that I see attempt it (on a professional and individual level), I'd be keen to understand how. Edges are extraordinarily hard to come by in the market.

So if we accept active investors can’t beat the market and passive investments give superior returns why do these people continually accept the loses, some sort of masochism? Year in year out.

Those statements are too absolute. 

Some active investors can beat the market. For multiple definitions of what "the market" is. 

Not all passive investments give superior results.  For a start it would depend what the underlying investments were. I'd take an active renewables fund (or IT ETF etc) against passive oil and gas index fund (or ETF etc) any day. 

Or an active smaller companies fund against a passive global smaller companies.

Would I take a passive renewables vs an active ? Probably but I'd expect there will be some better actives as well.

Now in the long term it is true that a passive whole of market(or wide ranging global anyway, eg thousands of companies) will beat most general active funds. But the key word is "most" 

As to why do investors accept  inferior results? I think it most cases it's because they don't know they are inferior. Look at all those well off investors in SJP for example.  Happy with mediocre results because they don't know better. 

Linton

TBC15 said:

BritishInvestor said:

dunstonh said:

BritishInvestor said:

enthusiasticsaver said:

Just looking at the charges is a bit like comparing apples and pears and having invested with VLS60 for about 6 years I moved to an IFA last year and was under no illusion that the charges would be higher.  The performance of the VLS60 though over the last 12 months is 4.4% whereas the portfolio under my IFA has returned  almost 10% with a similar asset allocation of 60% equities and 40% fixed term.  A few of the funds he chose have performed very well over the last few months though so that has skewed the results.  The charges are higher but the return is too so overall it has performed better than in a passive multi asset fund.  I am only speaking from a personal point of view though and of course you could get investors with other IFAs producing completely different results. You cannot really only look at charges in isolation. 

An IFA (or anyone else for that matter) is unlikely to significantly outperform something like the LS range (or similar multi-asset low cost offerings) over the long term. 

That is easier than you seem to think.

Given that the vast, vast majority of people that I see attempt it (on a professional and individual level), I'd be keen to understand how. Edges are extraordinarily hard to come by in the market.

So if we accept active investors can’t beat the market and passive investments give superior returns why do these people continually accept the loses, some sort of masochism? Year in year out.

I do not accept that "active investors can’t beat the market and passive investments give superior returns".  But I would think it is highly likely that most people with actively invested portfolios underperform the market whilst most people with passive portfolios dont.

Seems contradictory but it's not: Most active investors under-perform the market for reasons that are nothing to do with active vs passive.  For example:
1) Excessive caution, perhaps deliberately or more likely that they dont know they are being over-cautious.
2) Limited choice of funds in pension schemes.
3) Lack of understanding of how to construct a diversified portfolio, fashion investing.
4) Failure to reduce charges to those necessary.  For example you may require IFA assistance, but dont have to pay more than 0.5%-1% annually for it.
5) Lack of knowledge of what options are available
6) Maximum long term returns may not be the primary objective
7) Failure to choose and monitor investments against objectives.

Such factors are far more important in determining performance than whether the funds used are active or passive. Active investment does not mean ruling out passive funds, but rather choosing funds that are appropriate for the purpose.  Ruling out active funds significantly limits your options.

[Deleted User]

A Financial Adviser's job is not to maximise the client's wealth but to manage the client's expectations. And since the client has been told quite explicitly not to expect to outperform the market, what follows is under-performance compared with a DIY investor because of fees and re-balancing to stay inside a dubiously sketched perimeter of risk-tolerance. In my opinion.

And that is to leave aside the question of an adviser's incentive in the matter of selecting which investments to recommend. 

BritishInvestor

AnotherJoe said:

TBC15 said:

BritishInvestor said:

dunstonh said:

BritishInvestor said:

enthusiasticsaver said:

Just looking at the charges is a bit like comparing apples and pears and having invested with VLS60 for about 6 years I moved to an IFA last year and was under no illusion that the charges would be higher.  The performance of the VLS60 though over the last 12 months is 4.4% whereas the portfolio under my IFA has returned  almost 10% with a similar asset allocation of 60% equities and 40% fixed term.  A few of the funds he chose have performed very well over the last few months though so that has skewed the results.  The charges are higher but the return is too so overall it has performed better than in a passive multi asset fund.  I am only speaking from a personal point of view though and of course you could get investors with other IFAs producing completely different results. You cannot really only look at charges in isolation. 

An IFA (or anyone else for that matter) is unlikely to significantly outperform something like the LS range (or similar multi-asset low cost offerings) over the long term. 

That is easier than you seem to think.

Given that the vast, vast majority of people that I see attempt it (on a professional and individual level), I'd be keen to understand how. Edges are extraordinarily hard to come by in the market.

So if we accept active investors can’t beat the market and passive investments give superior returns why do these people continually accept the loses, some sort of masochism? Year in year out.

Those statements are too absolute. 

Some active investors can beat the market. For multiple definitions of what "the market" is. 

Not all passive investments give superior results.  For a start it would depend what the underlying investments were. I'd take an active renewables fund (or IT ETF etc) against passive oil and gas index fund (or ETF etc) any day. 

Or an active smaller companies fund against a passive global smaller companies.

Would I take a passive renewables vs an active ? Probably but I'd expect there will be some better actives as well.

Now in the long term it is true that a passive whole of market(or wide ranging global anyway, eg thousands of companies) will beat most general active funds. But the key word is "most" 

As to why do investors accept  inferior results? I think it most cases it's because they don't know they are inferior. Look at all those well off investors in SJP for example.  Happy with mediocre results because they don't know better. 

If you look at SPIVA results active managers underperform (on average) in the small cap space as well. 
"But the key word is "most" 
Realistically it's not going to be possible to find the ones that are going to outperform ahead of time.

Linton

BritishInvestor said:

dunstonh said:

BritishInvestor said:

enthusiasticsaver said:

Just looking at the charges is a bit like comparing apples and pears and having invested with VLS60 for about 6 years I moved to an IFA last year and was under no illusion that the charges would be higher.  The performance of the VLS60 though over the last 12 months is 4.4% whereas the portfolio under my IFA has returned  almost 10% with a similar asset allocation of 60% equities and 40% fixed term.  A few of the funds he chose have performed very well over the last few months though so that has skewed the results.  The charges are higher but the return is too so overall it has performed better than in a passive multi asset fund.  I am only speaking from a personal point of view though and of course you could get investors with other IFAs producing completely different results. You cannot really only look at charges in isolation. 

An IFA (or anyone else for that matter) is unlikely to significantly outperform something like the LS range (or similar multi-asset low cost offerings) over the long term. 

That is easier than you seem to think.

Given that the vast, vast majority of people that I see attempt it (on a professional and individual level), I'd be keen to understand how. Edges are extraordinarily hard to come by in the market.

I suggest:
Primarily: Go for higher risk/return. Optimise diversification and avoid over-reliance on any particular fund, factor, geography, sector or company. Consider momentum effects where appropriate at the sector level.
At a second level choose niche funds with a good record but avoid compromising the primary strategies.

Linton

BritishInvestor said:

enthusiasticsaver said:

Just looking at the charges is a bit like comparing apples and pears and having invested with VLS60 for about 6 years I moved to an IFA last year and was under no illusion that the charges would be higher.  The performance of the VLS60 though over the last 12 months is 4.4% whereas the portfolio under my IFA has returned  almost 10% with a similar asset allocation of 60% equities and 40% fixed term.  A few of the funds he chose have performed very well over the last few months though so that has skewed the results.  The charges are higher but the return is too so overall it has performed better than in a passive multi asset fund.  I am only speaking from a personal point of view though and of course you could get investors with other IFAs producing completely different results. You cannot really only look at charges in isolation. 

An IFA (or anyone else for that matter) is unlikely to significantly outperform something like the LS range (or similar multi-asset low cost offerings) over the long term. 

Out-performing the Vanguard LS range is easy - the FTSE World index has outperformed VLS100 every year for the past 5 years.

zagfles

Linton said:

BritishInvestor said:

enthusiasticsaver said:

Just looking at the charges is a bit like comparing apples and pears and having invested with VLS60 for about 6 years I moved to an IFA last year and was under no illusion that the charges would be higher.  The performance of the VLS60 though over the last 12 months is 4.4% whereas the portfolio under my IFA has returned  almost 10% with a similar asset allocation of 60% equities and 40% fixed term.  A few of the funds he chose have performed very well over the last few months though so that has skewed the results.  The charges are higher but the return is too so overall it has performed better than in a passive multi asset fund.  I am only speaking from a personal point of view though and of course you could get investors with other IFAs producing completely different results. You cannot really only look at charges in isolation. 

An IFA (or anyone else for that matter) is unlikely to significantly outperform something like the LS range (or similar multi-asset low cost offerings) over the long term. 

Out-performing the Vanguard LS range is easy - the FTSE World index has outperformed VLS100 every year for the past 5 years.

Well it would do wouldn't it? Index trackers will always underperform the index they're tracking since they have charges.