My big problem with IFAs

When it comes to managing your investments, don't go to an independent financial adviser, says Bengt Saelensminde. You're better off doing it yourself.

12 August, 2013 My big problem with IFAs Dear Buzzhairs Buzzhairs, I'm constantly amazed by the things people are willing to pay others to do for them. Maybe I'm just a bit of a control freak and like to do things myself. And in any case if you want to pay someone to cut your toenails, or polish your car, who am I to question it? But there's one thing I'm not prepared to accept that it's worth subbing out to another. And that is, your financial affairs. To my mind, this job should be done by you – and probably only you. And it's great to see that more and more people are taking control of their own financial affairs. A recent survey by GFK says that of those that have used an IFA in the past, over two-thirds now say they'd prefer to dump them and buy investment products direct. I'm not surprised. Another bit of research out last week from unbiased.co.uk counts the cost of this advice. Its survey of IFA charges suggests on average, you'll pay some £300 for an IFA to tell you what to put in a ten grand ISA. Or try £1,500 for a bit of advice on how to invest a £50,000 windfall. You can see the full results here. But it's not just the IFA costs that are the problem. I've got three graver concerns… Advertisement This historic bubble looks ready to burst! If it does, it could ruin the finances of thousands of UK investors… including yours. In fact, if you don't take action to defend yourself today, you could face losing a huge portion of your personal wealth. Don't let that happen – click here now to secure your wealth. The Fleet Street Letter is a regulated product issued by Fleet Street Publications Ltd. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Past performance and forecasts are not a reliable indicator of future results. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. 0207 633 3600. Don't let them botch your finances The biggest reason people generally don't like the DIY approach is fear of a bad outcome. Quite right too… I just love watching those TV shows that highlight DIY botches. Sometimes it's better to leave it to the professionals. But when it comes to long term finances, I'm not convinced that the quality of the job is any better, if better at all, just because an adviser is involved. Though advisers will no doubt be competent and have sat industry exams (In fact, I did them myself many years ago), the fact is, the industry has always taken a rear-view approach to investment. That is, it uses history as a guide on how to invest. And I've got a big problem with that! Yes, the last thirty years have been great for equities and bonds… but does that mean the next thirty years will prove just as profitable? If you look at the long-term history, it suggests not. On top of the 'recent history' bias, is something called prospect theory. This is the idea that humans fear the prospect of a loss more than they embrace the prospect of a gain. IFAs know this, and often present investors with uninspiring investments that don't make the sort of returns they should, given the price investors pay. And that price comes in two parts… Secondary fees really sting The big issue with paying an adviser to put together a portfolio for you is that the costs don't stop there.   This year saw the introduction of the Retail Distribution Review (RDR); the idea is that financial advisers can't now take ongoing kick-back commissions from the funds they've put clients into. Clients have to be told about IFA fees in advance. And this has led to a great shake-up of the industry. But make no mistake, IFAs are still putting clients into what I consider to be very expensive funds. And frankly, I think they are rarely worth the money. Fund management charges on the ever-popular unit trusts in this country are way over the top. Because, today, if an investor wants a managed fund, there are loads of cheap alternatives available. Investment trusts are an old favourite of mine (Tim Bennett has a useful tutorial video on these), Exchange Traded Funds (ETFs) are increasingly popular, and often very cheap. On top of that, there's a new style of unit trust emerging, based on the US model where annual charges can be a fraction of what's charged here. Until we see firm evidence that advisers are putting clients into well managed, good value investment funds, then I think most investors will do well to avoid the advisers altogether. I mean if you are not at all comfortable with the idea of managing your own money, by all means enlist the help of a professional. But for me, it just makes sense to avoid the cost entirely. And anyway there's one last feather in the cap for the DIY approach. Advertisement The secret Downing Street plot to seize your wealth? Right now, the government are secretly plotting to plunder YOUR personal wealth. We believe savers and investors like you could be worst hit. And it could put everything you have worked hard to achieve at serious risk. Find out what's happening and what you can do – now. Click here for the full story. MoneyWeek magazine is an unregulated product published by MoneyWeek Ltd. Think about it When you wash your car yourself, you notice the nicks and scratches that might need a bit of attention. Similarly, managing your own financial affairs offers insights that might otherwise be missed. Is your fund really keeping up with your expectations? Has the fund manager hiked his fees? Can you get a bigger commission rebate by moving to a different fund supermarket? Sometimes you just can't beat a hands-on approach. On top of that, the DIY approach forces you to really think about what you want. Do your own financial projections; don't rely on what an adviser prophesies in his crystal ball. Can you afford to retire? Look, I've got nothing against professionally managed investments. For most investors, I can see the benefits of a managed fund. It's just that I question the wisdom of paying others to get you into those funds. Take just one investment trust, Witan, which has been available for private investors for over 100 years. With just this one fund, bought through a regular stockbroker, you can have a fully diversified, professionally managed retirement pot in just one investment!   I've taken the geographical breakdown of investments from Witan's website. Over the last ten years, the share price is up 169%, versus its benchmark return of 136%. The fund charges less than 1% in management fees per annum. Now, if someone's suddenly inherited £50k and wants it tucked away, why on earth would they pay £3k to an IFA to tailor an individual portfolio (which will probably have a considerable ongoing cost too), when they can just buy a ready-made, globally diversified fund in one pop?  Still, I'm glad to see real evidence of investors increasingly getting stuck in themselves. The fund management and advisory industry has grown fat raking over the carcasses of unimaginative investors over the years. Those days are over… it's now payback time! If you are interested in taking control of your own investments then you should sign up to MoneyWeek Basics. It's a free twice-weekly beginners' guide to investing. It'll tell you everything you need to know, in plan English. You can sign up here. Good investing, Bengt Saelensminde The Right Side PS: Got a comment on this article? Leave a comment on the MoneyWeek website, here. 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