Investment Advice Berkshire – The Investment Car Crash
I must admit I have always found the recommended approach when advising clients rather bizarre. I wonder if it is the right approach, it seems to be overly risk-centred, so that financial advisers are boxed in when delivering advice.
I wonder if this draconian approach is justified?
Can you imagine going to a car showroom and ordering a car, just as you place an order, the office manager jumps out and says “before you proceed with your purchase – have you considered the risks?”.
“No, what are they?”
Office Manager “Well in 2015, there were 1,732 deaths on UK roads and 22,137 serious injuries!”
“Oh, quite a small number, then.”
Office Manager “Yes, until you add all the less serious injuries, making a total of 186,209.
Now, would you still like to buy the car?”
“No thanks.”
Office Manager “OK, can I give you a lift home?”
“No I think I’ll walk !!”
Naturally, I hear you think, such a scenario would be absurd.
Even though the figures above are accurate, they do not take into account the many thousands more deaths that result from the pollution caused by cars.
Even so, when you purchase a car you are not averted at the point of sale from going ahead with your purchase. Sorry sir, I have just checked your propensity to speed so I think that the Maserati is not for you, how about a Honda Civic?
So why is it that in the highly regulated world of investment, that your behaviour and selections are controlled by the “compliance police” that govern advisers and investors actions.
Quite simply, it is, I believe because it is easy for people involved in compliance to understand.
It predominates their thoughts, almost to the exclusion of all else, if a client has to grow his investment by say 7% instead of 3/5% (in order to meet his capital goals), the adviser is hampered by compliance directives.
What if the client is invested in pensions, where he might be invested for several years (makes no difference to the overseers of compliance).
How frustrating!
Unscrupulous advisers can take advantage of the compliance directives AND client’s Myopic loss aversion (the combination of a greater sensitivity to losses than to gains and a tendency to evaluate outcomes frequently). Typically by saying – you don’t want to take a risk do you ?
No – Daddy says the client.
Don’t worry Son, says the adviser sweeping the weeping client into his arms, I will put you into some cautious rated funds, and I will remind you every year to avoid those nasty stock market risks. (And to hell with your future!)
This over-emphasis on client investment risk is not backed by any rationale research, nor does it feature in Portfolio Selection – the white paper that won the Nobel Prize for Economics in 1948.
Of course Risk needs to be considered but ALL Risks, not just investor risk –
What about the Risks of not achieving sufficient capital (by not taking sufficient investment Risk).
What about inflationary Risk?
What about investment term Risk, that is making sure your client has his money correctly invested for short, medium term and long term periods.
All that is achieved by an overly investment risk-centred approach, is to ensure that many clients will never accumulate sufficient capital, if so, a further risk arises, namely: that most will outlive their capital.
A great deal more thought is required to compiling investment portfolios than the usual mismatch of cautious funds that get the adviser off the hook with compliance but leave the client on the rack in his retirement years.
That is the reason why on this wonderfully sunny day, I am in the office, compiling changes in our model portfolios that will deal with the market mayhem, that is about to be unleashed.
