In the words of Professor John Kay, “the knowledge of financial advisers rarely extends beyond the relaying of conventional wisdom”. That is not to say that good, well-qualified financial planners do not exist out there who will be able to guide you towards your objectives (in return for a not insubstantial fee). Nevertheless, beware of the adviser who promises to outperform the stock market for you – it won`t happen.
The first question you need to consider is how much of this work you can in fact undertake by yourself, without the billable hours being clocked up by a professional.
One of the main regulatory duties of a financial adviser is to “know their client” before being in a position to provide investment advice. This will involve asking a series of questions and then establishing both your attitude to, and capacity for, risk. I have witnessed many different approaches to this risk assessment stage – ranging from the highly subjective, “well, you feel like a balanced investor to me” to the completion of risk-profiling questionnaires and careful interrogation.
This is a discipline for which you do not need to pay fees. First, you have your own instincts, borne of experience, as to how comfortable you feel about taking varying degrees of investment risk. Second, “Money Guidance” will allow you to benchmark and validate your own risk profile perception by granting you free access to the very best psychometric software used by the leading financial planners. We pay the licence fee; you benefit from the personalised report, provided instantly via email. No catch.
Next, any financial planner worth their salt will move on to a meaningful analysis of your future cash flow. Industry cash flow forecasting tools do not come cheap and, traditionally, you will be charged a fee of around £1,500 for such an exercise (often referred to as Life Planning). Once again, in the interest of enabling investors, Money Guidance has chosen to make available what we consider to be the best Cash Flow Modelling tool currently on the market – that offered by Voyant – to our website users, free of charge.
It is only after having gone through these two important stages that consideration should be given to the appropriateness, or otherwise, of making investments. Once again, effective investing demands a structure, not a random walk. This is too complex a subject to address in such a limited space but, suffice to say, this stage is not about searching for what someone feels might represent the best products or star fund managers. More than 90% of the variation in investment returns will be influenced by the mix of assets (e.g. cash, bonds, equities, etc.) that you select at the outset – corresponding to your risk profile. Maximising your investment return involves the need to re-balance these asset allocations on a regular basis. Perhaps surprisingly, only 4% of returns are generated by the quality of stock-picking and 2% through market timing. I shall have much more to say about this key area at a later stage.