Readers of this column over the last 27 years will know of my deep concern of how customers are loaded unerringly into the wrong funds at the wrong time.
We buy a pension and think, great, that’s a boring subject out of the way and it’s ‘filed’ to the cupboard with the heating manual. Happy days.
I’ve just had a look back at older columns to point out the warnings and saw a column from eight years ago.
One comparison proved that ‘filing’ in the cupboard wasn’t a great idea so unearthing them for a dust-off alongside a review with a professional investment adviser is a great idea.
£100,000 invested over 20 years into a very well-known but ‘worst-performing’ fund created an income of £91.35 per week.
In the ‘top-performing’ fund over that same period, the income created was £407.21.
That is a significant but permanent impact – that’s your income for life.
Pretend you are the £91, or the £407, and think of your friend retiring at the same time and deciding on your life choices each week: Golf, a holiday, a few beers? One of you will not be able to do what the other can.
That should not be the case, and it’s often just because you chose the outer wrapper – the pension, ISA, investment bond or trust – but paid no attention to the fund it is invested into, with, as you can see, very impactful consequences.
While you may not have been advised to pick the ‘top’ fund, the closer you get there with your investment adviser’s fund choice, the better, because that income is permanent.
There are many reasons this happens, of course, and when you pay for financial advice, you might think you are being advised on the best funds.
This is often far from the truth because that is not the qualified role of the IFA unless they have much deeper qualifications.
I will cover that over the next few weeks in detail so you can avoid the same mistakes.
In its study on its wider suitability work, the Financial Conduct Authority (FCA) repeatedly found weaknesses such as reliance on past performance without understanding risks or return drivers.
Very few financial advisory firms have an investment specialist who is suitably experienced or qualified to do the fund research.
While perfectly qualified and excellent to handhold and guide their customers through the maze of financial planning, the investment research is indeed a completely separate, and highly sophisticated, field of its own.
The choice of which fund should be used should be chosen by a suitably qualified and experienced person within the independent adviser firm.
As ‘Behavioural Investment’ puts it: The practical consequence is the overwhelming majority of UK IFA firms – particularly the thousands of small, independently owned practices – are selecting funds, building portfolios, or choosing fund manager relationships without anyone in the building who is formally trained to analyse an investment fund. They are using cumulative performance tables, platform best-buy lists, risk-rating tools, and third-party research notes as substitutes for genuine analytical competence.
This is not necessarily criticism of the IFA (they have lots to do) or a regulatory failure, of course – the FCA has never required IFAs to hold investment management qualifications because the regulatory framework distinguishes between advising on investments and managing investments.
But it is a knowledge gap which clients are almost entirely unaware of, and one which directly feeds the cumulative-performance-chasing and mediocre fund selection patterns.
The important learning point is to fully separate the handholding through the muddied waters of your financial plan with your IFA or financial adviser, and whether or not that can be married to the correct investment research and fund choice by that same firm, because the impact on your autonomy and volition to make your own choice later in life depend on it.
It’s nicer if you and your friend can play at the same golf course, go to the same pub or restaurant rather than staring at a football screen on your own.
I will cover cumulative performance next week.
I will be creating a guide to investing, so, if you would like a complimentary copy, please email info@wwfp.net.
If you have a financial enquiry, please call 023 8064 9674 or email info@wwfp.net.
Peter McGahan is the Chief Executive Officer of independent financial adviser firm, Worldwide Financial Planning.
Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority.