My own investment career started exactly 10 years ago when I had a meeting with my then financial adviser at a high street bank. I was 20 years old, had quite a lot savings from pocket money (thanks to the gigantic piggy bank my parents used to have) and summer jobs, wanted to do something with them.
My personal preference was to invest across a range of company shares and funds, taking advantage of the annual tax-free savings / investment allowance (ISA) and spread it over a few years to minimise volatility (yes I somehow knew about them at that age).
When I told my my father about that idea, he was supportive but suggested having a chat with a financial adviser first. He was a long-term client of a bank and thus made an intro for me to go and see an adviser.
Here are my takeaways from the meeting.
1. Being a financial adviser at banks is a BS job
As the name suggests, financial advisers advise and manage your investments on your behalf. You essentially outsource such tasks to them as you are either too busy and/or have insufficient expertise to perform the activity yourself.
My view on outsourcing is that most tasks that you outsource do not require an expert as you are simply leveraging other people’s time in order to save yours (e.g. you do not need a world-class cleaner to clean your house).
However for critical issues like medical care and investment management, you absolutely need the expertise as they will have significant life-impacting effects.
Consequently I expect my financial advisor to be at least:
- More knowledgeable than me about the investment landscape.
- Achieved superior after-expense investment performance versus what I can get from the market average (i.e. index funds).
- As a result of the above, be wealthier than me.
With the above in mind, I met John, my father’s financial adviser. Frankly the meeting was quite underwhelming.
John turned out to be:
- A 50-year old unenthusiastic man who had been working at the same bank for 20 years.
- He still had a massive mortgage, 3 credit cards and in his own words, “working longer to start his retirement savings”, not a great sign of financial success.
- Didn’t know (or refused to discuss) any investment funds outside of his bank.
- Could not answer basic questions about portfolio performance or fees.
None of the traits outlined above filled me with confidence and I politely excused myself.
The lesson learnt here is that unless your financial adviser really aspires you then s/he probably shouldn’t be in the business of advising your financial success!
2. Financial advisers are not good value for money in general
Assuming you do manage to find an adviser that fills you with confidence, the key to understand whether a he is likely to act in your best interest (as he should) is to understand how he is compensated.
Nowadays in the U.K., financial advisers must charge you for the advice they provide. Previously their advice was supposed to be free and impartial yet their remuneration was entirely based on the commission received from selling certain financial products, which often led to the highest commission-paying products being recommended to customers without understanding their suitability. A clear conflict of interest.
Most advisers will charge you between £150-300 per hour for the advice. Given the average pension portfolio size in the U.K. is around £50,000 and you normally need 2 sessions per year to review the performance, that’s up to 1.2% of your portfolio gone, straight away, every year, before any fee deduction.
An annual fee of 1.2% might sound like a tiny amount now, however when compounded over 35 years (the usual working life of most workers today), this adds up rapidly (15% lower portfolio size than if you had just stuck with a cheap index fund).
Wouldn’t you rather have that sitting in your pension fund rather than someone else’s? I thought so.
3. You should be your own financial adviser
So where do we go from here? I’m a strong believer in investing DIY. For a number of reasons:
You know your situation better than anyone.
Seems obvious but you know exactly where you want to get to so why ask and pay someone else to tell you that?
DIY investing is very easy now.
You can now open a brokerage account online with discounted brokers like Hargreaves Lansdown or iWeb for free in a matter of minutes. These online brokers give you a wide range of investment choices ranging from individual stocks, bonds to mutual funds and ETFs, all transacting at very low cost. Take advantage of them. They will save you on average several hundred £ per year. Use them!
It is much cheaper than getting a financial adviser
Most investors do not need a financial adviser, let’s face it. It has been empirically documented in numerous studies that passive investing in index funds (a technique where you mimic the market benchmark performance rather than actively trying to beat it) offers significantly improved results compared to active management after taking management fees into consideration (these are very real costs).
You can purchase the Legal & General International Index Trust for free on Hargreaves Lansdown and then pay 0.53% annually to maintain it, instead of the typical 1% levied by your financial adviser. It gives you diversified ownership in every blue-chip company in the world across over 10 countries and multiple sectors at a very competitive rate and it mimics the FTSE World Index very closely. Much cheaper and easier than a financial adviser.
Unless your financial adviser really holds the values that you aspire to, you probably should not stick with him. There are far better and hassle-free alternatives elsewhere, which can save you lots of money in the long-run.
Do you have a financial adviser? Will you stick with him in the long run? I’d love to hear your thoughts. Please comment away.