Many independent financial advisers talk a good game but when you dig deeper it becomes pretty obvious that they have only a cursory understanding of economics and the markets.
In fairness, very few can be expected to be trained economists, but is a generic understanding of the different asset classes and the principles of diversification really enough to offer quality advice?
Saying that, a Harvard- or Cambridge-educated strategist might be paid half a million a year at an investment bank to work on asset allocation, and can still get it wrong — so why should an IFA be expected to get it right?
No one can predict the future and if you spread the risk and adapt a portfolio to your client’s age and risk appetite, you’ve surely done alright — or so the argument runs.
Now I’m certainly not arguing that IFAs need to have detailed knowledge of every single market and economy globally. That would be absurd. But it can’t hurt for them to have a grasp on the bigger picture.
In my opinion, the best, most rounded IFAs are the ones who understand the forces of the global economy and marketplace.
Is it possible, for example, for someone to give good investment advice if they don’t understand the impact quantitative easing has had on bond yields?
A standardised portfolio for an investor who says she is risk-averse is likely to contain a high proportion of bonds — but shouldn’t IFAs be worrying that the 30-year bull market in bonds is over?
After all, with the massive bond-buying programmes adopted by many central banks drawing to a close as economies recover, and the days of ultra-low interest rates numbered, fixed income assets are arguably looking dangerously overpriced.
The Bank of England owns nearly a third of the gilt market and its buying has compressed bond yields by 1%, according to some market commentators. Once inflation is taken into account, real yields are even lower, barely positive.
It looks like the Bank of England may become the first of the world’s major central banks to raise interest rates from their record lows, in all likelihood by next spring.
Institutional investors in the UK have been quick to respond to the changed outlook and sold more bond funds than they bought between April and June – but retail investors continued to pile into them. They put almost £600m into bond funds over the second quarter, according to figures from the Investment Management Association (IMA).
But how many IFAs are aware of this broader, and arguably crucial, development within fixed income — and have adapted (their client portfolios) accordingly? How many make the link between the end of QE and the impact that will have on the performance of bond funds – so-called ‘safe’ assets?
Given the vast spectrum of investment advice IFAs are allowed to give, it is perhaps not surprising that they tend to gravitate towards standardised portfolios, rather than investments tailored to the changing macro-economic – and market – climate.
But does this really constitute robust, and quality, financial advice?