Talk about depressing reading. Every month, the Investment Management Association publishes tables showing where retail investors have been putting their money over the previous few weeks – and every month it’s the same story.
Everyone invests their cash in the same place: bonds might be in favour for a while, then equities might enjoy a spell in the sun. Property will get a go, too. It’s not where people are investing that’s significant here but the fact they’re all doing the same thing.
Are people really so similar? Does the grandmother in Southampton investing to supplement her meagre retirement income really have the same needs as the 25-year-old trainee teacher in Stockport trying to save up for a deposit on his first home? Of course not. So why does their money end up in the same type of investments – and often even the same funds?
The answer is to be found in the independent financial advice these folk are receiving. IFAs suffer from a serious case of groupthink – the idea of standing out from their peers absolutely terrifies them.
You can partly can understand that fear. Our financial services sector is tightly regulated by watchdogs with a box-ticking mentality. Advisers must all pass the same exams before they’re let loose on clients, they must complete the same forms to prove to the regulator that they’re serving those clients well, and they’re judged in relation to the performance of their peers. The result is that we have reared a generation of risk-averse IFAs for whom there is little incentive to think differently.
At least that’s the kind way of putting it. A less charitable view is that far too many IFAs behave like dim-witted sheep – they flock down the same well-trodden paths convinced that, by grouping together, they’ll be safe from predators.
It’s the ‘no-one gets fired for buying IBM’ mentality. Advisers who invest in the same fund as all their peers know that two clients comparing notes won’t discover that one of them is doing much worse than the other. Nor is there any incentive for advisers to call each other out for bad advice.
However, while we might sympathise with this caution, we can’t afford to condone it. The result is that many of their clients are poorly served. When an adviser works this way he is by definition putting his own needs before the needs of his clients – that’s the complete opposite of what personalised, expert financial advice is all about.
At its worst, this is the kind of behaviour that has seen hundreds of thousands of investors shuffled into crud like structured products, high-risk split capital investment trusts, over-priced technology funds and precipice bonds. It wasn’t that IFAs were too stupid to spot the problems with many of these products – it was just that, since all their peers were shuffling client money into them, they felt obliged to do the same.
What people need is financial advice that is based on their individual needs – since my problems are likely to be completely different to yours, our respective advisers should be offering us completely different answers. I want my adviser’s long-term investment strategy for me to be an imaginative and innovative response to my needs and objectives, not a carbon copy of the plan he punted out to the four clients he’s already seen today.
Let’s be fair. There are IFAs out there who have been brave enough to stick their heads above their parapet. However, they are in the minority – the herd instinct is strong in financial services and investors are suffering as a result.