Don’t do it all by yourself

Managing your own investment portfolio may be a false economy, as Tristan Blythe explains


The Retail Distribution Review (RDR) was the biggest shake up in the UK’s financial services sector for a generation. RDR aimed to improve the integrity of advice and service that clients received.

One key element of this was a move toward transparency in how a client paid for advice. Two models for this now exist. Firstly, advice is paid for as a professional service, with an agreed fee. Secondly, advice appears as “free” to clients, but the adviser is remunerated by commission from financial product providers. This latter model leaves open the opportunity for advisers to invest in vehicles which pay them more commission.

Now advisers have to make clear to clients which of these models they are using.

One unintended consequence of this is the potential development of a so-called “advice gap”, the idea that some less wealthy individuals will no longer be able to afford to access financial advice, having previously received “free” advice paid for by third-party commission payments.

While DIY investment may seem an obvious saving, quite apart from the time required, research suggests it is a false economy

Even some wealthy individuals are being priced out or believe the value added by professional investment managers is insufficient to justify the costs. These self-directed investors are now managing their own investments.

While DIY investment may seem an obvious saving, quite apart from the time required, research suggests it is a false economy.

During economic booms, it may seem that anybody can generate good returns. But downturns can demonstrate the advantages of taking professional advice. Research from Tulip Financial Research in 2009 showed that investors who sought advice performed better during the financial crisis. Tulip’s data showed that acting fast was the key to achieving better performance. Those who took advice, just half those surveyed, fell into this category.

Even if you are persuaded to take professional advice, the next challenge is how to choose a wealth manager. There are resources available to help those prepared to invest time, though these tend to be well-kept secrets, available to those who know where to find them or who have a network of relevant contacts.

One example, How to Manage your Banker, a new book written by a former private banker, provides a series of specific checklists of points to consider at various stages of the relationship. The book provides a checklist of 32 questions to ask a prospective asset manager at the outset and takes the reader through the entire relationship with an international perspective.

Suggested questions include:

Does the investment philosophy meet the needs of the client?

Is the potential client comfortable with the culture of the firm?

Is the bank’s reward system aligned to the client?

Are the costs and fees “reasonable and appropriate”?

The choice of different firms in the UK, from the smallest to the largest, is huge and confusing to many. However, results from PAM Insights show that size doesn’t determine either investment performance or “softer” service skills.

Good portfolio reporting can help an individual understand their performance, as well as tax and how this impacts on their overall wealth.

According to PAM Insights, the standard of reporting has improved markedly in recent years and has provided significant benefits to many clients.

Finding the right professional investment manager can, despite the fees, end up paying for itself in the long run.