There have been a lot of negative comments around the Retail Distribution Review (RDR) and how many financial planners are being forced to leave the industry. Some may view this as good news when it appears some have been taking unrealistic levels of commission however I want to paint a picture where actually now is the time where paying someone to advise you is more prevalent than ever.
One thing that fascinates me is behavioural finance. This studies the behaviour of investors and how although we would consider ourselves rational we tend to be sucked into bubbles. This goes back through time to the Tulip bubble and more recently the US housing bubble.
It is well recognised that many investors look at the winners and invest where they see gains without really doing the research. Often when approaching investments, investors sell their losers and hold onto the winners. I recently looked at some of the best performing funds over the last 5 years and this showed a splattering of bond funds, is that the place to invest?
As a business we have been saying for a while that we are in the biggest bubble ever, and that bubble will burst however we just don’t know when. Let me paint a picture. For the last ten years we have been told that it has been a lost decade for equities. In fact bonds have outperformed equities if we believe this. You just need to pick up the papers for confirmation on this.
We also know that investors who have benefited from the rise in bond funds are reluctant to rotate their investments into equities. There was also a recent survey which showed that over 70% of investors were not prepared to take any risk with their money.
Investors also seem unaware that retirement is not a short-term experience but can be twenty plus year.
So, we are facing a very different environment but an environment where individuals are being encouraged to make their own decisions, many of these individuals will act irrationally. Before I go on I just want to take an example of a share. If you purchased Liontrust shares in April 2012 the shares were around 120p, within a period of around four months they went down to 90p.
At this point an irrational investor will jump ship to protect their losses, since November the share price has gone from 100p to a high of 150p.
It is worth considering this when investors pick last year’s winners, or hold onto their gains. It is about understanding the market and that is why I believe it pays to pay someone to guide you with your financial plans.
Going back to the bubble, consider this:
- Over the last ten years the FTSE All Share Index has risen by 132%, Gilts 56% and RPI 38%
- Bonds have given stellar returns and continue to deliver but gilts are hovering at around 2%, there will be a correction, we don’t know when but it will happen
- Between 1992 and 1997 inflation was 14.9%, the Halifax Liquid Gold account returned 16.4%. Between 2007 and 2012 inflation was 16.5% and the Halifax Liquid Gold account returned 0.8%
- The new Bank of England Chairman has clearly indicated his focus is on growth and not inflation, inflation is headed in one direction and that is up
- Interest rates are unlikely to rise until 2017, and banks will not be quick to pass on the rises to savers. Inflation rising, cash is dead
- The bubble is that of risk aversion, as individuals we fear losing our money and therefore we move to “risk free” assets like bonds, cash but the party is over
My point is this a good financial planner will not only understand an individual’s goals and deliver a plan but he will also be a contrarian and look to really understand the the direction of the market. This may mean he makes decision that are contrary to what the market is saying. That is why paying a financial planner for his knowledge is worth its weight in gold.