An IFA can be asked about almost any financial question in a person’s life. A client may need advice on saving for retirement, organising money to buy a home, dealing with tax matters, considering how to pass on assets to the next generation or more general assistance with planning future income and spending patterns.
Above all, an IFA will be asked how someone should invest his or her savings, so that their money can grow and take care of their future financial needs.
Many IFAs recognise they are the GPs of the financial advisory world. They are there to understand individual savers, and to help pilot them through the seas of tax advice, investment advice and the financial planning they will need to handle their money well. Often the IFA will use a specialist, a financial or investment consultant or manager, to provide the best service to his client. At the heart of the service an IFA traditionally provides lies the question of how a client should invest his money. What can he expect by way of return? How much does he need to save to ensure the mortgage is repaid or a decent pension is provided? Some IFAs decide to specialise in one or more of the skills they need, and to buy in the other advice and management from elsewhere to provide a better overall service.
The first task of any investment adviser is to understand the client’s needs and wishes. Often this will entail drawing up a long-term financial plan, looking at how much a person is likely to earn, how much they can afford to save, and what large financial events or risks they need to manage. An important part of that plan will be determining what can be saved during the most productive periods of someone’s working life, and what can best be done with the assets he has accumulated to meet both his living requirements and to promote his greater financial well-being. How much does the person need to have in his own housing? What income in old age would he like to have? Are there large bills to meet in the meantime? How much, and when, does he wish to give to his children or other relatives? Are there school fees and care costs in the family that have to be met?
The second task is to sit down and decide how to invest the available capital and any continuing savings. Many IFAs now consider themselves too busy meeting and talking to clients daily, understanding client needs and reporting back on progress to be able to follow world markets themselves in detail or to call the shots for the investment portfolio or pension fund. They look for suitable partners among the investment management specialists to undertake that work for them. The IFA retains, and is responsible to, the client, but has a professional manager to carry out the client’s and IFA’s instructions.
The IFA’s role is still central to the task of handling a person’s savings well. He still has to find out how much investment risk a client can accept. He has to help the client choose a fund or investment manager that works for him, given the amount of money he has, given the risk he is prepared to run, given his wishes on how to invest, and given his needs for reporting and information on his savings.
Risk is a difficult concept. It is fundamental to the way investment management is currently regulated, and to the way many investment professionals run their portfolios. The most common definition of risk is past price movements of assets used by the savers. If you buy shares you might experience a large loss in any given year if the market falls or the price of your shares goes down, or you might experience a substantial gain.
The choice of investment manager needs to take into account the manager’s ability to meet modern requirements of risk management, and to have the back-up of good research and global understanding of markets, but also to be able to provide individual service that responds to the client and IFA needs.
John Redwood is chairman of the investment committee at City-based portfolio manager Charles Stanley Pan Asset, and a Tory MP
