IFA sheep are too afraid not to follow the herd

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.

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11 thoughts on “IFA sheep are too afraid not to follow the herd

  • I’m genuinely not sure where to start with my response to this, David. It’s no doubt written to provoke a reaction from the IFA community, which I’m sure you will achieve.

    You mention structured products, but keep in mind these were (in the main) being flogged to customers by the banks, not by IFAs.

    The alternative to the ‘dim witted sheep’ approach you uncharitable describe is recommending things like Arch cru, Keydata and other products which were sold to IFAs on the basis they would help advisers stand out from the crowd.

    In fact, I would rather be a sheep than recommend untested, unsuitable products to my clients. There is nothing wrong with being slightly boring when it comes to advice.

    Of course if you still think what IFAs do is about the funds they recommend, you’re a (very) long way behind the curve.

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  • I thought your response was mild Martin.
    I don’t often read these things because they are utter nonsense and sadly, I have been proved correct. Very ill informed and completely out of touch.

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  • Badly thought out, unsubstantiated drivel.

    Change the word ‘IFA’ for ‘Doctor’, and ‘Structured Products’ for ‘Thalidomide’ or Architect and Asbestos and see if this rant makes sense.

    Investors ARE suffering. They suffer when Banks and Providers invent complex solutions for simple problems. They suffer when they are sold clever stuff, as opposed to boring stuff.

    In fact, I would make the plea the other way. Can we all do really boring Investments, so our clients can live interesting lives without worry and unexpected losses

    I can only hope this was a draft he submitted by mistake

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  • Good article, and I agree entirely with the sentiment. Obviously, generalisations abound, but I agree with the basic premise. Trying to be different for the sake of it is daft, but genuinely thinking through advice for each client is what we’re paid for. Too many abdicate that responsibility.
    If evidence were needed, try the IMA stats showing 70% plus of all investments each month are made using an intermediary, and yet when criticism is made of investor’s “sheep-like” investing habits, its’ the investors themselves who are blamed. The intermediary must take responsibility.

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    • I think the key issue here is muddling two important things.

      This reply, and the article, assumes that all the advice is only about which fund to invest in this month.

      As an IFA / Planner, I know that this part is such a small part of the role. And frankly, the real difference between funds in the same asset class is marginal to non existent

      Our role – and advice – is about all the other stuff, the stuff that the Investment Industry, and those that write ‘Investment Porn’ – “The 5 Funds you must buy this week” – never see. And would not understand anyway.

      Keep it simple, it’s not about the Product or Fund, it’s only ever about the client

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  • I can only add a couple of comments of the many streaming in my head;

    1. If they’re publishing the data every month, how am I possibly going to know what Damian, Martin or Phil is recommending to their clients each and every month? let along have time to copy them. Most good firms will have an investment committee backed by an investment philosophy which might see many quarters of review before action is taken to change a recommended fund.

    2. Much of the national press has an obsession with ‘best buy’ tables. That is more likely to direct retail client money to hot, top performing funds.

    3. Our typical portfolios hold 12 funds, I understand this is similar to the industry average. When I see clients with portfolios from D2C platforms, it is nearly always fewer, and often just a single fund. How many clients are only invested in Woodford’s new fund following a certain firms marketing blitz on the launch.

    So much more I could add, hopefully others will.

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  • Hi David Prosser,

    As usual for a journo you want to run with the hare and with the hounds.

    No doubt you are equally quick off the mark with criticism of commission hungry salesmen when you need copy in a hurry.

    Over many years I have come to realise that the vast majority of people just want me to give them back a little more than they gave me to look after.

    There may be very clever and sophisticated risk management tools available now but when the s..t hits the fan a clients attitude to risk means they don’t want you to lose what they gave you to manage.

    Sadly as IFA’s we are expected to assume responsibility for product liability when we have absolutely no control or influence over the performance of that product.

    Product manufacturers continue to ” practice ” their trade with other peoples money smug in the knowledge that the price of failure is levied elsewhere.

    I have never thought that clients employed me to gamble with their money and if that usually means adopting a somewhat cautious vanilla approach by using funds which I believe I can understand and trust then at least I am minimising the risk of unpleasant surprises for my clients.

    Most of us take our responsibilities more seriously than you could ever imagine David as we know what we do is never going to become the wrapping paper for tomorrows chips.

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  • As ever with an article written to provoke a reaction and therefore maximise views, I think there are some valid points here.

    Regulation and the exam culture do indeed encourage advisers to give everyone the same advice. If a client insisted that we effect a transaction which didn’t seem aligned to their circumstances (according to standard thinking), the regulator and our PI would insist that we resign as their adviser. Because if it went wrong the client could complain, and the FOS would likely take the side of the client. I have had this experience.

    But the article spectacularly misses the point about how IFAs invest their clients money. DFMs and fund managers may well hold the view that IFAs all pick the same fund, because fund picking is THEIR world. But this is NOT how many IFAs manage their clients investments, which focuses much more on asset allocation and alignment to risk and objectives.

    Working on an asset allocation model means the choice of fund manager is at best a secondary consideration, possibly third behind cost. I’m sure this is something that makes fund managers uncomfortable.

    So I’d suggest the ‘sheep’ tag is an irrelevant, and would respectfully suggest Mr Prosser spend some time with IFAs to see how our proposition differs from DFMs and ‘wealth managers’. I think then he’d understand the accusations that his article is misinformed.

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  • What a dreadful article, as wide of the mark as possible, without leaving the planet entirely.

    The “Grandmother in Southampton” and “Trainee Teacher in Stockport” with different objectives will likely have very different asset allocations, albeit some crossover on the funds held.

    Meanwhile why wouldn’t a Grandmother in Southampton and a Grandmother in Carlisle with the same circumstances, needs and aspirations have the same assert allocation and underlying funds? Such uniformity is a sound discipline, not a herding instinct.

    The past problems dumped daily on the good Advisers stem from those going off-piste, trying to be different, straying into funds and instruments they didn’t fully understand, swayed by their last good lunch or tempted by rewards unbecoming of the task in hand.

    All best summed up with the time-honoured acronym KISS. It’s really all that is needed.

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  • Hi David
    I think you might get a job at New Model Adviser. They publish the sort of things you write, and it generates a load of revenue for them.
    Adviser Lounge is a place for grown up discussion. I’m a bit surprised that Phil didnt refer you to a more appropriate website.
    Philip

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  • I’ll not waste time with the more obvious holes in this rather uninformed collection of stereotypes: IMA stats lag not lead, asset allocations differ by respective weights not constituents, normal distribution of fund selection naturally leads to a core of most popular funds, exceptional results are the exception by definition, and so on.

    I’d rather illustrate my understanding of financial advisors’ “State of the Union” using gbi2’s experience over the last 18 months working with an increasing number of advisers choosing to (re)build investment propositions, and being prepared to pay not insignificant amounts (modesty forbids) to get what they believe to be the right result for their clients. Far from being “dim-witted sheep”, these advisers are increasing their business risk, e.g. by recognising that external DFMs have a bias due to a relationship with a portfolio, and not a client. They are seeking DFM permissions and recruiting investment managers. One client has gone so far as to purchase a DFM business outright.

    Provider’s formulaic asset allocation models are being challenged. Supporting marketing and educational material is increasingly bespoke, rather than borrowing templates from the pet platform.

    Organisations like Raymond James are demonstrating how operational excellence allows advisers to use a wider range of investments eg Investment Trusts, ETFs and direct securities. Limit orders, switches by holding, rules-based rebalancing etc are activities that the “usual suspect” platforms cannot accommodate. All of these activities are used to recognise the particular requirements of the advisers’ own client bank.

    I’m most impressed at the willingness of businesses to recognise that financial planning is not investment management, and are integrating the two disciplines by recruiting expertise rather than by simply following the lead of the last fund group they met.

    In fact precisely the opposite of the behaviour Mr. Prosser assumes (ie does not evidence) to be the case…

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