The power of marketing – a lesson in RDR……

I have just received some marketing material from Chelsea Financial Services, not as big as Hargreaves but on a level. To me these companies have a responsibility to create a new world in the direct market space however clearly they are making hay whilst the sun is still shinning.

Towards the end of 2012 financial advisers were getting a battering because of hidden commission and clients not being aware that they were paying for the service they were receiving (or not as may have been the case). My argument was that in many cases financial planners had moved away from these models but the danger was in the direct market.

The direct providers do not currently have to disclose the fees they are taking, however they will -  possible as early as 2014. This will lead to a change in the pricing models for many of these providers because clients who have thought they were getting something for nothing will have to pay. We are starting to see how this might play out with some charging quarterly fees of £20 and fully rebating back any money to the clients (although rebates will go).

So why has Chelsea Financial Services irritated me. Well to me they are using the tactics that the FSA are trying to stamp out. Nothing in what they are saying is incorrect but the implication is that they are doing something for free.

To quote “and because we don’t provide advice, we don’t charge you for it, making Chelsea cheaper than most Financial Advisers.”

“You may have read in the press that Financial Advisers are no longer able to receive commission from providers of investment products…..”

“……it can be commission-type fee, which advisers deduct from the money you invest, and often on an on-going basis too…..”

The point of RDR was to ensure clients were clear on what they are paying for. The implication from Chelsea (like others) is that they are doing this for free because they are not advising. I looked in the small print and read this “Chelsea receives commission from product providers….”

I also dug through the paperwork and discovered that they feel they are not “affected by the recent legislation….”

The reality is this:

• They are currently not affected by the recent legislation but they will be
• They do receive commission for their service and although they take no up-front commission they appear to provide no rebates on fund annual charges
• Possible as early as 2014 this hidden charge will have to be disclosed and they will need to charge clients a fee

It’s time these providers took responsibility for what they do  and fully disclose their commission before they have to……

The dangers of focusing on reward

One of my colleagues recently wrote an excellent paper focusing on risk. The dust has still not settled post RDR and it will not settle for some time to come. However, it is likely that more people will turn their hands to DIY investment initially and done right it can work well.

I recently received a marketing campaign from a direct provider. It was promoting or celebrating the 25^th anniversary of a fund. If I had invested £10,000 25 years ago and re-invested all the dividends the fund would be worth a massive £180,000. Of course we are told that humans are rational beings however the reality is different. The marketing is very clever because you focus on the reward without considering the risk.

Let me take an example of what I do every day. I cycle five miles to work. I have been doing this for twenty plus years. Without thinking I am pre-set to consider the risks and take steps to mitigate the risks. So I have lights, helmet and reflective clothes. I also consider the route I take and may take a different route if the weather makes that route dangerous. My goal is to get to work and to get home. I also check my tyres, brakes etc before I leave. I possible don’t really think about it now - it is just part of the routine. Of course things happen which I can’t control, a car pulling across my path, black ice and debris on the road but these are hazards you have to accept.

However, sometimes we just look at the reward. I need to get somewhere quickly and the bike is the easiest way to get there. I can jump on the bike with no safety equipment and I might reach my goal but equally without things like lights and a helmet I am increasing the risk or danger of achieving my goal.

Investment risk is the same. We have all seen the graph which places cash and bonds at the lowest end of the risk spectrum and equities at the top and this is all we see. However as humans we are not always rational when it comes to investing in fact we are inpatient and want to make a quick return.

Going back to the example the focus is on the reward, there were four pages talking about the fund and even an interview with the fund manager. It may have discussed the risk but that seemed irrelevant and it would be interesting to consider how many invest on the back of that, it would then be interesting to see how many ride the whole course and how many jump at the first hurdle, and after twenty five years how many are happy with the return or disappointed.

Risk aversion is one of the biggest fears, but we must tackle this head on. If I have £10,000 in cash which I know I will use each month over a 12 month period then holding in cash is possible the best route, it could be used as an offset on the mortgage or earn a tiny bit of interest. But I know in real terms with inflation I am losing money on this. However, if I don’t need that money should I be holding it in cash?

Cash is dead, this is not a fear story it is the truth I can print many stats to support this. Twenty years ago cash was used to provide an income through the interest, this can no longer be done. Interest rates could go down and possible they won’t go up until 2017. Inflation is likely to go one way over the long term and that is up which means in real terms cash will be killed.

Of course bonds are the alternative option but a word of caution; bond returns do not reflect the underlying market. Investors will see the long term returns and not consider the future risks. With all bubbles the danger point is at the euphoria. I am sure if we are honest we have all been there, with the dot com bubble funds were going up 100% in a year and we wanted a bit of that. In reality the party had finished and it was just a matter of time before the whole bubble went crashing down.

When it comes to investing the risk is in not doing your homework, and getting the right equipment to deliver. You also have to accept that events happen which you cannot control. Retirement has changed we will live in the main for twenty years in retirement. If you were forty would you hold all your money in cash for twenty years, of course of you wouldn’t?

So how do you consider risk and not get sucked into the marketing. Understanding risk is important, there are different explanations:

“the uncertainty that exists as to what the eventual outcome will be” – Rozskowski and Davey 2010

“risk is a permanent loss of capital and not volatility” – James Montier

“risk comes from not knowing what you are doing” – Warren Buffett

I have argued that the first step is for us to understand what our goals are, and consider whether these are realistic. Once we have considered the goals then we have to consider how we will deliver those goals. I read a brilliant article that set out some questions around risk:

How much risk are you prepared to take to achieve your goals? 

How much risk do you need to take to have a reasonable chance of achieving sufficient growth to achieve your goals? 

How much risk can you afford to take?

You can only consider these against your goals. With our investments we have taken some additional risk by investing directly in shares however I have done my research I have also set trigger points and because of timescales I believe we can afford to take the additional risk. I had a tax bill to pay and I set aside some money to pay that bill, I could have invested that money but instead I held in cash because I couldn’t afford to take any risk with that money. So different goals have different risks.

In summary it is very easy to focus on the reward but before being sucked into glossy marketing or headlines focus on the fundamentals. One final bit of advice diversification is key, you can have cash you can have bonds and you can equities but you need to dig deep and think differently and not necessarily follow the herd.

Let’s talk about villains

In the final blog responding to “This is Money” I want to talk about villains and the future.

Let’s talk about villains

So say we have this sea of orphan clients what will happen. I believe there will be a whole generation that won’t have access to advice, but I also think that many people are so focused on saving money on things they buy that actually they go about investing in the wrong way.

I can say with confidence that although many direct platforms talk about tools to help clients they don’t really help. As can be seen in this article the focus is on costs and products when actually whether advised or not the focus should be on goals. I don’t see the largest provider of direct products pushing this.

When I buy shares or funds I do my research and certainly for shares I have a target price, this doesn’t mean I sell but I reassess my position. Of course I do get it wrong sometimes but I try to be a patient long term investor. I have a get rich slowly strategy.

If we want to know how to make it work then the focus for the direct side needs to take a leaf from financial planning i.e. its less about the product its more about the goals. When you have you your goals then you can do your research.

I can research funds and investments but certainly for funds I want to talk to the fund manager, to the team and I want to talk to others because only then can I get the feeling that this is right for me. Research tools or marketing articles are dangerous because they can sell you what the person wants you to buy.

So the villains really are those who may mop up these orphan clients but provide no true help to them.

Let’s talk about the future

I met someone before Christmas and he gave me a reality check, I hear platforms saying they are the best, I hear direct platforms so they will dominate the market, I see what journalists write and the one thing that this person said was that one thing that is certain post 1 January 2013 is that nothing is certain. So by this we assume clients won’t pay because we present it in a way that clients will not pay, we assume clients will be orphaned because of the way we package the fees, we assume the direct market will mop up clients and we assume that the proposition is all about products and costs.

Actually we need to take a step back and perhaps do a little more digging and really understand what is out there. My view going in to 2013, and beyond – I believe that the financial planning world is in good shape and those who have adapted to the changes will work well with clients, I also believe that there are financial planners who have models in place for lower value clients. Controversially I think that the direct platforms that are dominate today may be too big to adapt to the changes needed and it will be others who take the crown in twenty years’ time

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Let’s talk about orphans

In the fourth blog responding to “This is Money” I want to talk about orphan clients.

I recently read about a financial planner who bought someone’s business, the assets were £15 million and number of clients were 7,000. If you do the maths the average client has less than £2,500 in assets. If the adviser takes say 0.5% he is taking on average £10 per client.

Simple maths for any business is that this doesn’t work and this also applies for direct businesses. Direct businesses have all been about expensive marketing campaigns but if your income is going to reduce you cannot afford to give this sort of service.

There has to a point in any business where you say we can’t service those clients or we have a packaged solution. Ultimately a client with £30,000 could become a client with £100,000 plus. So sometimes you have to assess all the details.

Of course there will be losers in this but there already was. For a number of reasons we are one of those losers we have less than £20,000 in savings and we could not get advice because we can’t afford to regularly save. So I have had to go back to basics, draw up a plan and put that in place. I am less concerned with cost but more concerned with the investments I choose and how much I save and whether that will deliver on the goals. In the future we hope to have enough to hand it over to an adviser but we have to do the hard work at the beginning.

Let’s talk about products

In the third blog responding to “This is Money” I want to talk about products.

The journalist and Gina Miller are missing the fundamentals of advice. Product is almost a by-product of the process. The product delivers the solution. With advice the first step is understanding someone’s needs and producing a plan to deliver on those goals and needs.

We have two services a bespoke service where we pick funds and build portfolios, without going into much detail clients have access to us 24 hours a day 365 days of the year, we meet fund managers and we provide clients with access to all the information we have so they feel comfortable with what we are doing. Perhaps as she says we are investment managers but I think we are a lot more than that.

Ultimately the bespoke service is there to deliver on the goals and is a by-product of what we do.

The second service we have is packaged, it’s the same process of identifying goals but clients have less access to us and we use more packaged solutions. The cost is less but again it is just a by-product of what we do.

We strongly believe in active managers and we believe good active managers can outperform in the long-term, however we believe there can be a place for ETFs or passive funds and that is not about cost.

The problem with where the journalist is coming from is again old fashioned. It is assumed that the adviser picks an ISA, picks a fund and doesn’t care about cost. It doesn’t work that way now.