It’s possible to be a DIY investor and to manage your portfolio and financial affairs on your own, without the help of a financial adviser. It’s certainly feasible when your young and your portfolio is relatively small. But is it wise to try it indefinitely?
The following is an extract from a new book by DANIEL CROWE and PETER MANCELL from Mancell Financial Group, an evidence-financial planning firm in Tasmania. The book is called Your Investment Philosophy: A Guide to Managing Wealth & Protecting it from Fraudsters, Marketers & Doom Merchants, and this extract is published here with the authors’ kind permission.
Armed with the principles of a robust investment philosophy, the tools to build a portfolio, and knowing the importance of remaining composed for the long term, you might ask: why do I need a financial adviser?
In our office we have a saying: Goals. Plans. Portfolios. We have essentially summarised the portfolio or investment section. It’s the last piece of the puzzle and despite us dedicating a book to it, it’s often given too much significance when people think of financial advice.
The portfolio serves the plan. The plan sets out the roadmap to achieve your goal. Without the goal, what point is the portfolio? Each investor must define what money means and what money needs to achieve in their life. That is the goal. A good adviser starts there.
We are biased about our value, but even with a reliable set of principles to follow, managing your wealth is a challenge and requires commitment. If you view managing your wealth as an engaging outlet, a genuine source of pride, and something you want to pursue, we wish you every success, but not everyone has a genuine interest in doing it. We say genuine because while DIY options look appealing, investors need to establish whether they genuinely want to manage their own affairs, because half-hearted DIY attempts can be costly.
We believe a committed person could use our book to manage their portfolio, but the portfolio isn’t everything, so consider who you listen to on this topic. There is a small and vocal group of DIY investors who are absolutely capable of managing their own wealth. They spend a large amount of time posting on internet forums, building spreadsheets, listening to podcasts, and reading more complex books than ours. When they’re not doing this, they’re spending their time trying to cajole less committed investors into doing the same.
This is ego. It’s a boast, rather than genuine concern and understanding. It’s not that they’re untrustworthy or don’t know what they’re talking about. When it comes to investing, many are quite brilliant. They might know everything about investing, but they don’t know you.
Theory of mind is the ability to understand other people have beliefs, motivations, knowledge, and emotions that may be different to our own. DIY investors, on a crusade to recruit more converts, are often absent of this understanding. Financial advisers are always listening and asking questions as to why someone walks through their door. There are always different reasons, but at the core a person might be too busy, not capable, or even interested in spending time managing their wealth. They want to spend their time doing something else.
Choosing to be a DIY investor or advised investor poses several questions:
Which one of these people are you?
How do you want to spend your time?
Are you committed to managing your wealth at every stage of life? Can you accept and act on advice?
Financial advice can benefit everyone, but not everyone will want it, or even have the personality to accept it. Some want full control and to do their own thing. Others struggle to relinquish control. These questions are ideally asked early and answered honestly. Identifying who you are negates the need to begin a potentially frustrating relationship.
DIY investors do walk into our office and hand over their affairs. While successful in business or career, they found themselves in a financial fog. Others, seeking a second opinion, are surprised by their oversights. Technical and planning mistakes can be costly. Asset structures, legislative matters, tax and estate planning, asset and business sale knowledge get complicated. When the option to delegate becomes reality, genuine desire becomes an issue.
Having the ability to delegate is a skill and realisation. The willingness to embrace a sober second opinion. When someone embraces delegation, in our eyes they have come to the realisation about what truly matters: time.
Time is the most precious commodity we have. To spend it doing what we want, with those we care for, is a gift. It’s why our advice doesn’t specifically focus on money. We tell our clients to think about money from one perspective: ensure it allows you to spend your time, doing what you enjoy most, with the people you care about.
Time becomes a reality when we find clarity. Good advice offers clarity. It reveals the current position, it clears the path and brings understanding on how to reach goals. Good quality financial advice offers the ability to relax and stop worrying about money. It means outsourcing investing and technical matters, while being supported in making good decisions.
Braking before breaking
Investors can make panicked decisions in rough markets. The market then rebounds and the investor, stuck in cash, misses the recovery. We haven’t stopped everyone from selling out, the final decision lays with the investor, but 99% of the time we’ve been the buffer that’s averted a big mistake. This poor behaviour is often highlighted by the advice community as why investors need an adviser and guidance, but it would be wrong to assume rough markets are the only time investors make mistakes.
The response to market corrections can often be lectures about resilience and stoicism. These may work as a blanket approach during a storm, but what happens when an investor is primed to make a serious error on a sunny day? What is the trigger? Quoting Greek and Roman stoics or invoking Winston Churchill is unlikely to be helpful. While the decision will have a financial outcome, the motivation may be well removed from money. What is the thinking behind the action? What changes have occurred in the investor’s life? The adviser’s job is to build a strong enough relationship where they understand you, what actions may be out of character, and be comfortable enough to ask honest questions about your decisions.
Everyone can manage their own wealth. Financial markets are more open and democratic than they have ever been. Behaviour is not democratic. Behavioural coups happen very quickly, and at any time, even after years of stability. One poor decision can unwind a 25-year plan. We have seen sensible people, at every stage of life, tempted by outrageous speculations. If acted upon, they would have forfeited a large portion of their wealth. An adviser’s job is to put a brake on that behaviour. Good advice is about supporting good decision making.
Who to trust?
You may not become a client of ours due to logistics, circumstance, or availability, but it would be remiss if we did not highlight key attributes an adviser should have. The media will cook up lists about choosing a financial adviser and questions to ask. Many journalists don’t understand what an ongoing advice relationship may entail. With an outsider’s view, journalists will draw up boiler plate lists for the sake of generating content. An adviser’s true intent can be found very quickly by assessing the following.
The conversation. The focus should be on you and what’s important to you. An adviser should be listening and asking questions. We mentioned “theory of mind” earlier. Your goals and motivations should be embraced because they drive the process. An understanding of you, and what you want, can be paired with a sober assessment of your situation. It’s about identifying potential hurdles, the right technical solutions, and finally, a realistic path towards your desired outcomes. Financial advice is not a sales process. There needn’t be an overt focus on the adviser, their credentials, skills, supposed benevolence, or any personal selling feature. Genuine interest sells itself.
An investment philosophy. An adviser needn’t have gone to the trouble of publishing a book, but at the very minimum they need a document laying out their beliefs and investment principles. Evidence used in this document is important because it offers a consistent set of rules that portfolios are built around for all conditions. An absence of evidence may mean haphazard portfolio management. A change in market, economic conditions, or underperformance by their guru fund manager, means a change in your portfolio. You don’t want an adviser forever reacting and chasing performance.
An evidence-based investment philosophy should mean the adviser is agnostic about investment products and will build a portfolio at a low cost. It also should ensure there is no compensation between adviser and fund manager. Simply, the adviser is working for you.
Performance. Any increase in performance can only come through increased risk and there’s no guarantee it will come at all. If an adviser makes promises on performance, you are entering into a relationship that will likely result in frustration and disappointment. To put it bluntly, advisers promising returns are either dishonest or fools. They are trying to win your favour, or they don’t understand markets.
Financial advice is about understanding, assessing, finding ways to improve, offering clarity, supporting good decision making and adjusting as your circumstances change. It can be a great relationship that spans decades and every stage of life.
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