- A recent study carried out by Vanguard found that investors with a financial adviser on average earned about 3% per year more than those without an adviser.
- There is no shortage of quality funds across all asset classes and having the freedom to make informed choices can help improve portfolio efficiency and overall performance.
- A fund managers ability to maintain a consistent level of performance when compared to competing same sector funds is an important metric for many investors when making investment decisions.
- Quality advice and portfolio management firms understand fund and fund manager performance and are able to use this knowledge to identify the best options and build efficient, top performing portfolios. It is this process that distinguishes the top advice firms from the rest.
The value of investment advice has always been a topic that has divided opinion among investors. Some see great value in advice service whereas others see it as an unnecessary expense. The value of investment advice is also now challenged by convenient, lower cost self investor platforms which have pushed more investors towards managing their own portfolios. Yet despite the challenges posed by self managed platforms and the perceptions of high advice costs, research from Vanguard shows that investment advice on average increases portfolio values by 3% per year.
Investment advice and its associated costs, more often than not, has proven to be a valuable investment for investors to make.
But the fact is, this could be much more. As despite the added value good advice provides, there is often significant room for improvement due to 2 simple factors.
In this report, we identify the key benefits of good investment advice, why only a small percentage of advisers are able to outperform, and the reasons why many advised clients miss out on extra portfolio growth.
The Value of Investment Advice
A recent study carried out by Vanguard found that investors with a financial adviser on average earned about 3% per year more than those without an adviser. Whilst 3% per year might not sound like much, over time, it can add up.
For example, a starting investment value of £250,000 that grew by 5% per year would be valued at £495,000 after 15 years. However, by factoring in the additional 3% that on average a financial adviser adds, the same investment would grow to £734,000. Nearly £240,000 more.
However, the true added value of working with a quality adviser who has a thorough understanding of fund performance and fund manager quality, investors can look beyond these averages.
What Is Good Investment Advice?
There are a number of key factors that are essential to good investment advice.
Asset Allocation
Asset allocation refers to the percentages of a portfolio invested in various asset classes such as equities, bonds, and cash investments, according to the investor’s financial situation, risk tolerance, and time horizon. It is the most important determinant of the return variability and longterm performance of a broadly diversified portfolio.
A sound investment plan begins with an individual’s investment recommendation plan. This outlines financial objectives as well as any other pertinent information such as asset allocation, fund selection, financial contributions, and time horizon. Unfortunately, many ignore this critical effort, in part because it can be very time-consuming, detail-oriented, and tedious. But the financial plan is integral to success; it’s the blueprint for a client’s entire investment strategy and, done well, provides a firm foundation on which all else rests.
Starting with a well-thought-out plan can not only ensure that investors will be in the best position possible to meet their long-term financial goals but can also form the basis for future behavioural coaching. Whether the markets have been performing well or poorly, good investment advisers cut through the noise they hear suggesting that if they’re not making changes in their investments, they’re doing something wrong. Almost none of what investors hear pertains to their specific objectives: Market performance and headlines change far more often. Thus, not reacting to the ever-present noise and sticking to the plan can add tremendous value. The process sounds simple but has proven to be very difficult for investors and some advisors.
Asset allocation and diversification are two of the most powerful tools advisors can use to help their clients achieve their financial goals and manage investment risk.
Rebalancing
Given the importance of selecting an asset allocation, it’s also vital to maintain that allocation. As investments produce different returns over time, the portfolio likely drifts from its target allocation, acquiring new risk-and-return characteristics that may be inconsistent with your original preferences. A portfolio overweight to particular sectors or regions is more vulnerable to equity market corrections, putting it at risk of larger losses.
Helping investors stay committed to their asset allocation strategy and remain invested increases the probability of meeting their goals. But the task of rebalancing is often an emotional challenge for investors. Historically, portfolio rebalancing opportunities have occurred when there has been a wide dispersion between the returns of different asset classes. Whether in bull or bear markets, reallocating assets from the better performing asset classes to the worse-performing ones feels counterintuitive. But a good advisor can provide the discipline to rebalance when it is needed most, which is often when it involves a very uncomfortable leap of faith.
Advisors who can systematically direct investor cash flows into the most underweighted asset class or rebalance to the most appropriate boundary are likely to reduce rebalancing costs and thereby increase the returns their clients keep.
Behavioural Coaching
Because investing evokes emotion, advisors need to help their clients maintain a long-term perspective and a disciplined approach. This can add a large amount of potential value. Most investors are aware of these time-tested principles; the hard part is sticking to them in the best and worst of times. Having emotions isn’t a “rational or irrational investor” issue; it’s a human issue. It’s normal for people to be swayed by the opinions voiced by those considered experts—the talking heads or news headlines that often recommend change. Abandoning a well-planned investment strategy can be costly, and research has shown that some of the most significant challenges are behavioural.
For some investors, factors that affect their wealth are almost as serious as those affecting their health. A quality adviser provides emotional detachment which is one of their most overlooked benefits.
When investors are tempted to abandon the markets because performance has been temporarily poor, advisers can remind them of the plan they created before emotions were involved. The trust a good adviser creates can be crucial in helping investors meet their financial goals.
Advisors can act as emotional circuit breakers by circumventing clients’ tendencies to make emotional decisions in changing markets. In the process, they may prevent significant wealth destruction and add value. A single such intervention could more than offset years of advisory fees.
Complex Planning Requirements
When complex financial planning is required, the value of financial advice can prove vital. For example, it would be very difficult for an individual to arrange and map out their own phased retirement plan (if this is their best option) when they come to retire, or for an individual to put in place the best measures to protect their assets from Inheritance Tax.
Specialist financial advice is just that: specialised! And because so much of the financial planning requirement is connected or inter-connected then the advice required in one area could knock onto another.
Investment Advisers Add Value But Only A Small Selection Add Real Value
While the key factors for good investment advice can add value to any investment portfolio there are a number of additional factors that most advisers don't utilise, factors that can add even more value to investors.
Although financial advisers can add sizeable value to investors over the course of their investment horizon, only a relatively small proportion have a high level knowledge of fund and fund manager performance. 2 areas that if measured and used effectively to implement and maintain a top performing portfolio of funds, can add significant additional value.
Such advisers are able to build and manage top performing portfolios suitable to their clients’ risk profile and overall objectives. But like any industry, there are those who are good at what they do, and there are those who are not. The main difference in the financial sector is that it is very difficult for a client to know whether their adviser is an expert in investment knowledge and decision making or if they know very little about it.
But the fact is, fund performance is not a regulated aspect of financial planning and there are many advisers in the UK who, while regulated and fully compliant, are not efficient at fund selection. As a result, many investors find themselves invested in funds that underperform - which can obviously limit the potential returns their portfolio can deliver.
It is not uncommon for investors to believe the growth returned by their portfolio is good, when the reality is they are missing out on sometimes significant extra growth each year - without increasing their risk exposure. We often hear statements like “My portfolio performed well this year as it returned growth of 10%”. But market conditions can dictate sector and fund performance which can result in a portfolio of poor performing funds returning a level of growth that is perceived to be good. But it’s only when you compare a portfolio against a similar risk portfolio of consistently top performing funds that you can determine if the performance was appropriate for the level of risk taken.
There are funds within each investment sector that have consistently delivered better performance than competing same sector funds. These funds are managed by fund managers who have proven their expertise within that particular sector. For example, the Royal London UK Equity fund has consistently been one of the best performing UK Equities, with returned growth of 26.33% over the recent 5-year period. This fund was launched in 1997, and it has consistently been one of the top funds in its sector yet it currently only holds £706 million of client assets. Making it a relatively under utilised fund despite its proven quality. In contrast, the Trojan Income fund has been one of the most heavily invested in UK Equity funds with almost £2 billion of funds under its management. Yet it has also consistently been one of the worst performing UK Equity funds with 5 year growth of 7.08%, which is less than half the sector average and significantly below the comparable Royal London UK Equity fund.
Quality advice and portfolio management firms understand fund and fund manager performance and are able to use this knowledge to identify the best options and build efficient, top performing portfolios. It is this process that distinguishes the top advice firms from the rest.
What Makes A Top Quality Fund?
Selecting funds/fund managers that consistently outperform their peers and fit within a suitable asset allocation model will help investors maximise their portfolios growth potential.
If your portfolio is managed by a financial adviser you want to make sure you are partnered with someone with a research driven knowledge in fund performance. There are financial advisers who demonstrate great expertise and knowledge when it comes to fund selection. However, fund performance is not a regulated aspect of financial planning, and financial advisers are not required to research funds. As a result, a large proportion demonstrate poor knowledge on the quality of funds they recommend.
Fund performance is a critical metric that efficient investors and high-quality advice firms analyse to help ensure their portfolios productively meet objectives while utilising the proven top-performing fund managers. Top advisers want to ensure the portfolios they recommend use top fund managers, and for investors who make their own fund decisions, the same should apply.
Why Fund Performance Matters
Past performance is not an indicator of future returns, but when asked, investors would prefer to invest with fund managers that consistently perform, over varying time frames, in the top 25% of performers in their sectors versus fund managers that perform in the worst 25% of performers.
Comparative Performance
Each fund’s performance can be compared alongside all other competing funds that are classified within the same sectors. How each fund compares over the medium to long term can identify the quality of the fund and the competence of the fund manager.
Fund manager accountability
Past performance exposes the effectiveness of funds and their fund managers. The funds that consistently rank highly in their sectors can reflect a level of expertise from the manager within that investment sector. Whereas, the fund managers whose funds continually rank lowly within their sector have demonstrated a lack of quality and an inability to deliver competitive returns for investors. Past performance is not an indicator of future returns, but it is important information that holds fund managers accountable for their performance.
For those that have maintained a high level of comparative performance, it is reasonable to assume they can do so in the future.
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The Best Performing Funds
There are approximately 3,000 investment funds available to UK investors that have received a sector classification from industry trade body the Investment Association. From these 3,000 funds, 20% have managed to consistently outperform at least half of all competing funds within their sectors over the past 1, 3 & 5 years, and have thus received a high quality 4 or 5-star performance rating from Yodelar. There is no shortage of quality funds across all asset classes and having the freedom to make informed choices can help improve portfolio efficiency and overall performance.
A fund managers ability to maintain a consistent level of performance when compared to competing same sector funds is an important metric for many investors when making investment decisions. The ability of a fund manager to maintain a level of outperformance in comparison to funds within the same sector demonstrates a level of quality and expertise that stands them above their peers.
Download The Best Funds Report
Restricted Advice Mean Restricted Fund Choices
What is restricted advice? - It was not until 2014 that the Financial Conduct Authority issued a definitive factsheet outlining what ‘independent’ and ‘restricted’ advice actually means in practice, and what is expected of advisers using these labels.
The distinction between the 2 has often divided opinion. Some are of the view that restricted advice does not impact on the quality of the advice consumers receive whereas others have argued that restricted firms often go down this route so that they can sell their own investment products, or those of their parent company, for their own gains instead of that of the consumer.
Why does it matter?
Independent Financial Advisers (IFA’s) are able to consider and recommend all types of retail investment products that could meet your needs and objectives. They are able to consider products from all firms across the market, in order to give unbiased and unrestricted advice.
However, financial advisers with a ‘restricted’ status cannot provide advice on ‘whole of market’ products but there are differing degrees of restrictions that ‘restricted’ advisers work to. For example, there are advisers who hold a restricted status because they won’t advise their clients on specialist products such as VCT’s (Venture Capital Trusts) or ETF’s (Exchange Traded Funds). Such limitations may have little to no impact on a proportion of investors.
However, when Financial advice companies choose to become restricted in order to ‘push’ their own products, platforms and investment funds that ‘restricted’ advice can become detrimental to the consumer. Such practices mean firms can earn bigger margins from selling their own products, and their clients are only exposed to a small range of products that might not be best suited to their needs - while often being more expensive.
Some investment portfolios use their own range of funds to form the underlying holdings, which significantly limits the number of quality options that are available for building a portfolio.
With access to funds across the whole market and with no allegiance to any fund manager, Yodelar Investments have an unrestrictive approach to investing that allows the freedom to make fund choices based on quality and suitability, which is key to the high level of portfolio efficiency and overall performance.
Investing Without Constraints
Many portfolio propositions have constraints due to the providers business model which limits the funds available for them to use in compiling their portfolios. For example, St James's Place and Hargreaves Lansdown’s portfolios only invest in their own brand of funds. True Potential have relationships with several fund management firms to use their funds in their portfolios and low cost online platform Nutmeg are limited to a range of low cost funds in order to maintain their low cost proposition.
In contrast, the Yodelar investment philosophy is to build efficiently balanced portfolios by utilising funds and fund managers that have proven their quality in sectors and regions. This philosophy removes any bias and emotional decision making that we believe can be detrimental to a portfolio’s objectives.
The Pitfalls of Self Investing
As more and more services move online, it is now easier than ever for investors to make and manage their investments through DIY investment platforms. Through these platforms it’s easy to hold funds, shares, bonds, exchange traded funds (ETFs) and other instruments within a tax wrapper. However, just because such options may be convenient doesn’t mean they are right for you.
The choices from these platforms are sometimes so great, it can be difficult for investors to build an efficient and diversified portfolio.
Some platforms have lists of recommended funds to help whittle things down, but investors should be aware that there may be conflicts of interest here; a fund supermarket may also be an asset manager, offering its “own brand” potentially at the expense of other products.
Funds may have annual management and performance charges, and there may be additional charges for dealing in shares. On top of this, platforms will charge an administration fee, which can be a percentage of your holdings or a flat fee.
Being a DIY investor means researching, buying and managing your own investments, and for some investors, this can be the best route to take.
However, although investors welcome more transparency and greater resources to help them self-manage their investments, for some, the value and peace of mind that a high quality independent financial adviser can provide is immeasurable and cannot be replaced.
Finding The Right Investment Adviser
5 questions to ask any would-be financial adviser
- Do you give independent or restricted financial advice?
- Do you sell your own company’s products or investment funds and if so how I can be convinced they are the most suitable products for me?
- What fees do I pay now and how do I pay them and how much do I pay on an ongoing basis?
- What initial advice and ongoing service do you provide?
- What processes do you have in place to ensure my money is only invested in the best and most suitable investments.
Leading The Way For Investors
The development of Yodelar Investment portfolios comes from years of research and analysis that included the consistent assessment of more than 100 fund managers, tens of thousands of funds and more than 30,000 investment portfolios. Our research continues to identify that a small proportion of funds and fund managers consistently delivered top performance, with more than 90% of the portfolios we review containing funds that continually underdeliver.
This research has enabled us to identify efficient processes and top-quality investments which we have utilised to create 10 strategically balanced, risk-rated portfolios that are built using only the top funds within each asset class and offer investors phenomenal potential for growth.
Yodelar provides an advice and information service that is changing the way investors think. Book a no obligation call with our team today and find out how we can help you grow your wealth efficiently.
Could Your Portfolio Do Better?
Whether or not you believe your portfolio has delivered competitive returns, its true performance can only be established by comparing its growth to that of a similar risk portfolio that consists of consistently top performing funds.
The unfortunate reality is that the vast majority of investors could achieve greater growth from their investments, without increasing risk, by making more informed fund decisions and investing in funds that have proven their quality consistently over different time periods.
Inefficient investing will undoubtedly have adverse long-term consequences, which is why it is so important to be able to distinguish the funds and fund managers who outperform their peers in order to ensure the advice you receive is up to par and that your portfolio is made up of high-quality funds.
Our free portfolio review service has helped thousands of investors to identify areas for improvement and provides complete clarity as to the quality of advice they have received, or the fund choices they have made.
Our portfolio review service will provide an independent analysis of your portfolio and identify:
- If your portfolio contains top, mediocre or poor performing funds
- How your portfolio growth compares to a similar risk portfolio of top-performing funds
- How efficient your fund choices have been, or whether the recommendations you have received from your adviser have been up to par.
- Potential areas for improvement
- The overall quality rating of your portfolio
Our portfolio analysis feature provides a clear insight into how each of your individual funds is performing while grading your portfolio based on its overall performance - making it easy to identify weak points or areas for potential improvement.
Upload your portfolio for a comprehensive portfolio analysis and find out how competitive the performance of your portfolio has been and if the advice you have received to date has been up to par.
