“The stock market is filled with individuals who know the price of everything, but the value of nothing.”

Phillip Fisher

When we started the business, we focused on investments; as we have developed, we placed greater emphasis on financial planning.

We have produced a series of blogs expanding on the importance of goals and plans within financial planning. In doing this we have played down the investment aspect; this was recently brought to light in an audit where the investment process was reviewed (very positively) but we were asked why we don’t talk more about it.

At a high level, a significant amount of time is spent on investment management. We meet over 100 fund managers a year, constantly monitor the performance and seek ways to improve the process. It is not something we shout about because it just happens.

Over the next few weeks we are going to put together a series of blogs which will look at our investment process. Our aim is to cover why and how we do it, including passive vs active and wrap it all up in the final blog! 

In this blog we will look at why we do what we do.

To outsource, or not to outsource, that is the question

Financial advice has come a long long way!!

A few years ago, an adviser would sell a product and pick a fund. Often the relationship after was non-existent.

This is no-longer the case, a modern-day adviser will take the journey extremely seriously. This is about a long-term relationship where trust is at the heart of what is offered. A client is trusting someone to manage their money, not only for them but in the future for whoever that money goes to. That is a serious commitment.  

We are strong believers in financial planning; it is about looking at the person’s circumstances, assets and needs and developing with them a strategy / plan to reach their goals.

Investments must play a part in that. In today’s age there are options for advisers to outsource this. The argument is that they don’t have time to do the research and build the portfolios. It is therefore easier to bring in a third party to provide such services.

We don’t see anything wrong with this but what we have discovered is that in many cases where the investment is outsourced the person paying for this is the client. If the financial adviser reduced their charges to reflect this, that maybe better but often, they don’t so client costs can increase considerably.

The second part is that we believe investments are the engine that helps in delivering the goal / plan. An adviser needs to understand what is happening, why decisions are being made and how that impacts on the advice they are giving. Once they hand that to someone else, they are detached from the process.

We believe that financial planners should control as much of the process as possible. We believe the value lies in managing the process in-house, compared to outsourcing. It doesn’t mean that an adviser who outsources is wrong, but we would want to challenge the fees they charge, and how they monitor the investments which ultimately deliver the goals.

Can anyone manage investments? 

We will in future blogs consider the process in more detail, and this forms an important aspect of what we do and will hopefully flesh out the answer to this.

There are over 2 million DIY investors in the UK. There is something like 3,000 plus funds in the UK. We read about DIY investors turning a few thousand pounds into hundreds of thousands of pounds and it seems simple. There are “buy lists”, and the financial sections of key news publications all provide the information that will lead us to “success”.

The truth is that perhaps 10% of the 2 million DIY investors do a good job. The example of Woodford is interesting; this was on the “buy lists” of many platforms, and journalists extolled the virtues of Woodford as a fund manager.

The easy thing to do is to look at the 25-year track record, think that is good and invest. But a small amount of research might have flagged some issues. The track record over five years was poor, the fund he built was the same as the one he managed previously so why was he doing that, and so-on. For those who did this research they might have concluded that it was not a good investment.

The key message is that before any investment is made research is the key. We can seek confirmation bias but fundamentally we should be looking for reasons not to invest. We can’t meet all the fund managers in the country, but we do identify the best in class, the next stage is meeting managers, researching etc.

Where we are leading is that yes people can manage investments, but it needs time and energy. That is why we think that perhaps 10% of DIY investors do any real research but the fact is that financial advisers find it hard to give this amount of time to the process. The reason why DIY investors turn to an adviser is because they realise, they don’t have the time. Equally an adviser outsources because they don’t have the time.

What do we do and why?

When we set up the company investments were at the heart of the business. Although our focus is on financial planning, investments remain a crucial element of what we do.

In part what we do is an intellectual exercise, but this is all part of the process. We meet over 100 managers a year, and we won’t invest with all of them. We are looking for the exceptional fund managers, from this we build the portfolios. In other blogs we will share how we approach this and what it looks like.

The reasons why we do it are:

  1. We believe that investments form part of the financial planning process and it is an element that we should retain control over. Good research takes time but that is why people pay us
  2. We don’t look to make outsize bets; we believe we can deliver average returns after charges of between 5% and 7% a year over a ten-year period (obviously things can change but currently we think that is a fair assumption)
  3. We take away the emotional side of investing by following a defined process which we believe will deliver returns above the benchmark over the long term

In summary, we think it is important to retain as much of the process as possible not only to keep charges in check but also to be able to provide a better service to the clients we work with. Anyone can manage their investments, but the level of research needed requires time and energy. That is what we are paid to do. Finally, we are not looking to make outsize bets, we are looking to have a defined process delivering what we believe are achievable returns.

In our next blog we will look at the process.

Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.