by Damien Clyburn
As the old saying goes, investing is simple, but it is not easy. Anyone can pick out a few shares of well-known companies , hold them in an online account, and keep their fingers crossed. However, it is much more difficult to establish whether the portfolio will be able to achieve the goals you are aiming to achieve - and then stomach the process.
I used to subscribe to the traditional model of making judgmental decisions, listening to the Negative Events World Service (News) and buying in to the marketing ‘bull' within the financial press. I took this approach in the earlier years of my financial planning career, because I was trying to convince clients I was intellectual, doing something for my fee: trying to justify my existence in their life. I would spend more time talking to client about where and what to invest in, rather than what they wanted to achieve during their lives.
But as I developed as a financial planner, I realised that there is a much more effective way to invest. Therefore, I no longer spend time worrying about news cycles, nor do I fill clients with information that I have no control over. One of the best decisions I have made was to employ a ‘third party' independent firm to help with our investment decisions, allowing me to concentrate on the things that matter for my clients.
However, many planners still choose to ignore the evidence and continue to lead clients up the garden path, with the judgmental ‘crystal ball' approach to investment management. I understand why. Financial services professionals want clients to feel they are receiving value for money from the relationship in the form of superior investment returns. This is understandable, as in most walks of life when you employ a professional or craftsman, you expect a little bit of action for your money.
However, when you chose to adopt a systematic approach to investing, it is tough to convince clients you are doing something for your fee. Once in place the portfolio is left to roll on in a set-and-forget manner. As my fellow financial planner Nick Lincoln mentions in his Money Hat Tip podcast, you basically invest and stare out of the window for the next 30 years.
Every time a client receives a valuation statement, the portfolio is unchanged in terms of its structure. Sometime the valuation has fallen in value and clients will ask, what are you going to do about it? The short answer is probably nothing! The due diligence carried out informs us that nothing! is usually - but not always – the right answer!
So how do we convince our clients we are actually doing something to justify our fees? The process is simple - but not easy.
Once I explain to my clients to accept that returns come from markets and are rarely enhanced by the judgmental approaches of market timing and stock picking, it is evident that structuring a well-thought-out mix of different investments (asset classes) should sit at the heart of the investment programme.
The primary decision is to decide how much to invest in growth assets (equities), and how much to invest in defensive assets (high quality bonds) that will offer protection from large falls in the value of the growth assets the client owns.
Setting expectations is crucial when the client's emotions kick in. Unfortunately, evolution has hard-wired the human brain to be particularly poor at making good investment decisions.
One of the hardest parts of investing is having the confidence and discipline to stick with the financial plan through thick and thin. A good financial planner will explain the role each of the assets plays in the portfolio, and this portfolio will only be implemented in line with the long-term financial plan. The plan comes before the portfolio, not the other way around.
Over time, and accentuated by rapid market rises or falls, the balance between riskier growth assets and defensive assets in a portfolio can drift away from the client's desired balance.
This requires considerable discipline, particularly during market turmoil, when the fear and greed emotions are most prominent. Therefore, it is crucial to remind clients to rebalance their portfolios within an agreed framework. Clients who don't rebalance their portfolios might theoretically end up with more money (as equities are likely to deliver higher returns than bonds over longer time periods), but they will suffer worse falls than portfolios that are rebalanced. These falls may end up being too large to stomach resulting in them bailing out of the strategy and destroying the long-term plan.
The final level of value that financial planners deliver is processing some of the menial, yet highly valuable, administrative tasks such as ensuring that all tax allowances are utilised. Ensuring withdrawals strategies are implemented on time, as well as reviewing and replacing any inappropriate products as things evolve overtime.
It is highly likely that if a client decided to manage their capital themselves, they would almost certainly end up with a less favourable outcome in the long run. New funds might be available that would be missed, the portfolio might need to be refined over time, all sorts of new investment fads and ideas might tempt them without the proper due diligence to understand what the risks and rewards are likely to be, and when markets crash, it is unlikely that they will have the fortitude to stick with the long term financial plan.
As mentioned earlier, I understand that clients judge the value of us as their financial planner on the performance of their investment portfolio. However, this is unfair as it fails to understand the true value that a good financial planner delivers. A good planner can earn their ongoing fee several times over, simply by helping clients to have patience, fortitude, and discipline during the investing journey.
Damien Clyburn is a Chartered Financial Planner and the Managing Director of Otter Financial.
