Benefits of advice go beyond client returns

When consumers consult a lawyer to handle a will or a mortgage transaction, they can pretty much guarantee that their solicitor will complete the transaction successfully. The outcomes are transparent and clear.

Advisers, however, have a problem. They cannot guarantee investment returns for clients. It is no surprise that this ‘failing’ is often at the heart of many mis-selling issues. Often the client believed that consulting an adviser would mean a better investment return because the adviser was an ‘investment expert’, but years later found out his investments proved to be duds and the adviser’s knowledge was little more than GCSE level. By then it was too late to do anything apart from complain.

I have often said that a good financial adviser ‘knows what he doesn’t know’ when it comes to investment, while a poor adviser simply pretends he knows more than he does.

With this in mind, it is encouraging to see that the whole nature of investment advice has changed in recent years. We have seen a huge rise in outsourced investment solutions such as Discretionary Fund Management, Centralised Investment Propositions and the like. I have recently spoken to many advisers who have admitted that handing on the burden of investment advice to someone else lifted a great weight from their shoulders. In hindsight, one of the flaws in the investment adviser market was expecting very small firms of advisers to invest client money on a global scale, with perfect timing and asset allocation. The job itself is huge and time-consuming. It needs big, well-resourced firms.

Advisers who have outsourced investment management have found that it allows them to concentrate on giving clients long-term financial advice, which is what they do best, and there are many other areas in which they can excel, such as tax planning and inheritance tax advice.

The growth of platforms has helped too, and the drive to lower costs through clean and super-clean share classes is welcome. The cost of investing has come down and clients have benefited as a result.

Often clients believed that consulting an adviser would mean a better return, but later found the adviser’s knowledge was little more than GCSE level

At this stage, I should make it clear I am no cheerleader for the DFM sector. There are issues on charges, transparency, monitoring and investment selection. DFMs can be variable, and outsourcing investment to a DFM does not give an adviser carte blanche to remove himself from the need to monitor performance and risk.

Certainly, more light needs to be shone on the DFM sector and the regulator is paying more attention, but outsourcing in this way does give advisers a great deal of extra freedom and is a sensible step.

I should add that I have great respect for the many advisers who prefer to manage client money on their own. They often have tried and tested model portfolios to suit individual clients’ risk profiles to keep things simple and they can have many years of experience in investment which can be invaluable.

Even so, I am coming round to the view that outsourcing to some degree makes considerable sense and is the way ahead. The benefits for the client can be considerable and can include lower costs, better rebalancing tools, a wider spread of investments, better risk mitigation, better research facilities and so on.

There may be a strong element of protection for the client too. If the portfolio is managed by a DFM it can fairly easily be passed on to another advisory firm, something that is not always the case when a portfolio is self-managed by an IFA.

So why is all this important, you might say? To my mind it goes to the heart of the key question for the future of the advisory sector: what role should the adviser have and how can they add value? Without adding true value, an adviser is effect­ively redundant.

A similar question is why would a client consult an adviser in the first place? In some cases it is event-driven, starting a family means a need for life insurance and investing for school fees and so on. For many clients, though, it will be the fear of getting it wrong by investing on a DIY basis without advice. A financial adviser is seen as a trusted consultant who can help a client make better decisions and, let us be fair, make a better return in the longer term.

In other words, seeking financial advice, while costly, has a number of benefits and only one of these has the potential for a better investment return. Even in this area, the client is more than likely mostly concerned about avoiding costly ­mistakes. Getting rich quick is probably not on his mind.

He does not need to know that his adviser is spending 23 hours a day managing his port­folio or is poring over the FT fund price tables on a daily basis, seeking an elusive extra return from Japanese smaller companies. They just need to know the investment job is being done properly.

Seeking financial advice has a number of benefits and only one of these is the potential for a better investment return

Kevin O’Donnell is a financial writer and journalist