If I can buy stocks and funds myself why do I need an adviser?

I’m 54, my friend told me that they had made lots of money buying stocks themselves, why should I pay for advice?

Carl Lamb responds

There are many things to consider when looking at the value of advice. Has your friend only told you about their winners? People do not like shouting about their investment which went to zero but will be more than happy to tell you about their winners. Another interesting thing to consider is the frame of reference. Would you consider a 10% return to be good? At first glance, yes, but if that is over a period when the market is up 50% suddenly 10% looks like a poor return. Of course, it is not simply a case of looking for a return; importantly, the other side of the coin is the risk you take in achieving that return.

Risk can be measured and assessed in many ways. If you invest with a financial adviser there is a factfinding process to establish your attitude to risk – this will consider things like your capacity for loss and your time horizon. Once this is established, we can look to build a portfolio which is suitable for your attitude to risk.  But how do we do this?

Risk can be managed through diversification. The adage, “don’t put all your eggs in one basket” rings true. Generally, a portfolio will be diversified through asset allocation and across different investments. For example, you will have some money in bonds, some in equities, some in property investments and some in other diversifying investments (plus a cash holding).

One of the ways our in-house Investment Team assesses the risk and return profile of a fund is to regularly meet with the fund managers.  We do this hundreds of times every year, ensuring that we continually revisit funds that we hold and gain an understanding of those that we do not.

Our process is not simply picking the best performing fund in each area over the last five or ten years, but looking at how the fund is positioned and making judgements about whether the investment environment will suit that fund going forward. There is also consideration around how different investments act in different market environments, an issue which is most crucial in times of market stress. It is great to have a portfolio full of high-risk equity investments in rising markets, but when there is a sell-off, you need diversifying assets like bonds or property to cushion the fall.

The table below shows three popular investment markets as well as the IA Sterling Strategic Bond (bonds) and UK Direct Property (property) sectors to demonstrate performance of some of these diversifiers. It is ranked each year from best to worst. You can see that over time the winners and losers change.

201220132014201520162017201820192020
BondsS&P 500S&P 500PropertyS&P 500FTSE WorldPropertyS&P 500S&P 500
FTSE WorldFTSE WorldFTSE WorldS&P 500FTSE WorldFTSE 100S&P 500FTSE WorldFTSE World
S&P 500FTSE 100PropertyFTSE WorldFTSE 100S&P 500BondsFTSE 100Bonds
FTSE 100PropertyBondsBondsBondsPropertyFTSE WorldBondsProperty
PropertyBondsFTSE 100FTSE 100PropertyBondsFTSE 100PropertyFTSE 100

Table Source: FE Analytics, calendar years, Total return in GBP

In times of market stress, a financial adviser should help take the emotion out of your investment decisions. It would be very easy to panic-sell out of investments when they fall, but if they are suitable for your attitude to risk and your time horizon all you will be doing is crystallising losses and removing the possibility for recovery. A study from Vanguard shows that this ‘Behavioural Coaching’ from advisers adds 1.5% to returns per year. Vanguard study: https://www.vanguard.co.uk/documents/adv/literature/adviser-alpha-value-on-value-brief.pdf

One of the strengths of Smith & Pinching is our range of Model Portfolios. Our Model range incorporates portfolios that meet a given level of risk across four ranges: S&P, Low Charge, Passive and Ethical. The S&P Models are “all of market”, which means that we can choose any investment and asset class, within the total risk parameters. These models are the starting point for the rest of the ranges. Low Charge uses the same asset allocation but blend active and low-cost passive investments. Passive simply uses passive (tracker) investments. Our Ethical models have proven popular over the last twelve months; again, these are based on the asset allocation from the S&P range, but investment uses a combination of avoiding ethical ‘negatives’ and investing in ethical ‘positives’ to do good things with your money.

In addition to our Models, we have discretionary fund management powers, which means that we can manage your Model investments within agreed parameters without having to obtain your prior agreement to every change.  This naturally leads to a more efficient management service, which we believe increases the chances to success.

Aside from having investments suitable for your attitude to risk, we provide other valuable services, which are derived from engagement with financial advisers. Considerations around ESG (environmental, social, governance) investing, i.e. doing positive things with your money, estate planning, and tax planning. We can also examine cash flow over any given period, so as to help plan for everyday expenditure, luxuries, and significant lifetime events, e.g. a new car, holidays, gifts, children’s wedding, retirement etc.  we can help you see how achievable these goals are and what impact they may have over the long term.

This all-inclusive advice is where we seek to add real value.  Your friends may have made a lot of money in Bitcoin or Gamestop, but did they tell you about their failures? How many column inches have been devoted to conscientious investors who lost a large portion of their assets with Neil Woodford? Are you able to manage the complicated and ever-changing tax legislation?  Are you planning for your retirement?  Have you considered the cost of Inheritance Tax to your beneficiaries? There are lots of questions which you may not even be thinking about now, but our holistic approach to financial advice means that these long-term considerations can be addressed in good time, giving you peace of mind.

The value of any investment may go down as well as up and you may not get back the full amount invested.  Past performance is not necessarily a guide to future performance.