Independent Financial Advisors

[Deleted User]

Once upon a time people used financial advisors to pick stocks and funds. The quality of advice was poor, the level of financial education was low, but stock and fund picking required a lot of specialist knowledge and help was genuinely needed. Wasn’t that long ago when financial statements lacked transparency, and mutual funds had meaningless or highly misleading names so that an average consumer would have been pretty clueless if he was buying growth, value, large or small. Rebalancing and comparing returns was really difficult with everyone reporting amazing growth just before you buy the fund. The costs lacked transparency.  At least good advisors knew rumours in the industry and had means of understanding what you were buying. 

Today its different. Morningstar and Trustnet made funds honest (for the most part). Information is easily accessible and provided in a consistent manner. Very easy to look under the bonnet and understand what you are buying. John Bogle turned the fund industry around by providing an excellent solution. Even active funds have been forced to lower the costs. Managing a cheap and well diversified portfolio is as easy as pressing a few keys on your IPad once or twice a year and adding to your units or shares in a simple multiasset fund. The quality of fund managers has improved. Its no longer tiny shops with inconsistent education trying to sell the wildest story. The likes of Blackrock, Vanguard, Schwab, Fidelity, HSBC are managing trillions and use well paid Harvard and Oxford graduates who apply consistent academic research to help investors succeed. 

IFAs can do lots of good things for you, but investment management isn’t it. They don’t add value unless you are completely ignorant. The quality of advisors varies and finding the better ones is hard; often they are not the ones with the slickest marketing,  And yet people delegate investment decisions to IFAs.  Why? People want hand holding. Makes them warm and fuzzy. Fine. Its a service. So why can’t IFAs use the same charging model as everyone else? Why are accountants, lawyers and  most consultants paid by the hour they spend working for you while IFAs are getting paid while they sleep?

#End of rant

[Deleted User]

Are you in Canada, Mordko?

Thrugelmir

As Warren Buffet famously quipped. If investing were that easy we'd all be librarians. You can always tell when markets are buoyant and investors become over confident in their own abilities. 

[Deleted User]

ZingPowZing said:

Are you in Canada, Mordko?

Yep. But I have a nontrivial amount in a UK SIPP. 

We do have a budding number of “fee for service” advisors in Canada. Still way too many charging a fixed percent year in year out. 

[Deleted User]

Thrugelmir said:

As Warren Buffet famously quipped. If investing were that easy we'd all be librarians. You can always tell when markets are buoyant and investors become over confident in their own abilities. 

That’s not at all what he said. He said that history isn’t all you need to be a money manager, otherwise librarians would have been the richest people. Very different meaning.  He also told us to buy index funds. 

There is plenty of evidence that people are learning from history and are generally better educated about money. Far more long term investments, fewer day traders, peoples’ pensions are managed much better. Does not mean they’ll be the richest by putting everything into an index and keeping it there until retirement. Means they will do a lot better than if they behaved liked in the olden days. 

[Deleted User]

Deleted_User said:

ZingPowZing said:

Are you in Canada, Mordko?

Yep. But I have a nontrivial amount in a UK SIPP. 

I think Financial Advisers (of either stripe) owe much of their privileged position to legacy. 
A generation ago, people in the UK got an annual pension statement once a year six months out of date. The reason it changed in 2014/15 was because UK people were getting a poor deal compared to other countries but in its heart, the financial services industry wishes it could go back to the former relationship, and clings on to the old benefits by whatever means are allowed.

Thrugelmir

Deleted_User said:

Thrugelmir said:

As Warren Buffet famously quipped. If investing were that easy we'd all be librarians. You can always tell when markets are buoyant and investors become over confident in their own abilities. 

fewer day traders, 

You've heard of Robinhood presumably? 

[Deleted User]

Thrugelmir said:

Deleted_User said:

Thrugelmir said:

As Warren Buffet famously quipped. If investing were that easy we'd all be librarians. You can always tell when markets are buoyant and investors become over confident in their own abilities. 

fewer day traders, 

You've heard of Robinhood presumably? 

Sure. I am talking about studies how invested funds are being managed overall. Robinhood plays with a small fraction of investible assets

Thrugelmir

Deleted_User said:

Thrugelmir said:

Deleted_User said:

Thrugelmir said:

As Warren Buffet famously quipped. If investing were that easy we'd all be librarians. You can always tell when markets are buoyant and investors become over confident in their own abilities. 

fewer day traders, 

You've heard of Robinhood presumably? 

Sure. I am talking about studies how invested funds are being managed overall. Robinhood plays with a small fraction of investible assets

When the market is dominated by passive funds. Who sets market prices? 

Linton

Your rant against the charging mechanism seems to display a surprising lack of understanding how markets work.  IFAs like other professionals require a certain amount of income to make the job worthwhile.  But if it is too lucrative more people will set up as IFAs and competition will drive prices down.  This is independent of how the charges happen to be calculated or expressed.

A major problem is that many people, especially those not used to dealing with lawyers or accountants want to know in advance how much the charges will be.  Saying £n an hour sounds like a licence for unlimited charging with work expanding to fill the wallet as required. A far more acceptable way is a simple formula based on known numbers.  Of course the IFA could say my charges are £X/hour and I will quote 8 hours for this job therefore the charge is £8X or he/she could say my charge for this size pot is X% of pot.  The amounts of money in both cases could be the same.

Expressing the charging as a % of pot has a great social advantage is that it enables people with smallerr pots to get advice when it would otherwise not be profitable to provide it.  You see this with lawyers charging per hour making legal assistance unavailable to many people.  It of course also assists the IFA by expanding the market for his/her services

[Deleted User]

Linton said:

Your rant against the charging mechanism seems to display a surprising lack of understanding how markets work.  IFAs like other professionals require a certain amount of income to make the job worthwhile.  But if it is too lucrative more people will set up as IFAs and competition will drive prices down.  This is independent of how the charges happen to be calculated or expressed.

A major problem is that many people, especially those not used to dealing with lawyers or accountants want to know in advance how much the charges will be.  Saying £n an hour sounds like a licence for unlimited charging with work expanding to fill the wallet as required. A far more acceptable way is a simple formula based on known numbers.  Of course the IFA could say my charges are £X/hour and I will quote 8 hours for this job therefore the charge is £8X or he/she could say my charge for this size pot is X% of pot.  The amounts of money in both cases could be the same.

Expressing the charging as a % of pot has a great social advantage is that it enables people with smallerr pots to get advice when it would otherwise not be profitable to provide it.  You see this with lawyers charging per hour making legal assistance unavailable to many people.  It of course also assists the IFA by expanding the market for his/her services

1. When I buy services of my accountant I get a quote wth the rate and a budget. If something goes wrong (which it does not) he has to get an authorization to go over the budget. 

2. In the real world UK advisors charge people with smaller pots such high percentage that its downright harmful. Even then they are only really interested in wealthy clients. More decent ones advise small pot clients to buy a simple fund and not use their service.  

3. Current system is not transparent. That stifles competition. Only people with little knowledge need advisors for investment management. People with little knowledge think 1% a year is cheap because it sounds cheap. They have no idea how much it will end up costing them. So there is no pressure to lower costs. This system will die as people become better informed.