The Rise and Risks of DIY investing

“Most people wouldn’t dream of repairing their own car or fixing their own plumbing and would instead opt for a trained professional. Shouldn’t the same apply when it comes to taking financial advice about some of the most important decisions in a person’s life?”

Thanks to the internet, the obstacles faced by do-it-yourself investors have fallen considerably in recent years.

Add to this the recent news that those approaching retirement will be offered free financial guidance by the government from April 2015, and it’s not surprising that more and more people are asking whether there’s any point forking out for an IFA at all?

Why pay for something we can either do ourselves or will get — at least in a ‘lite’ format — for free eventually anyway?

If the latest figures from the Financial Conduct Authority are anything to go by, the IFA coffin is well on track to being hermetically sealed. In the space of just two years, the number of advisers has plummeted from 41,000 to 32,690, and whilst the decline in IFA numbers has been less dramatic recently, there has been a steady reduction over time.

To put this into context, official industry figures reveal there are seven times more car mechanics in the UK than financial advisers – at 218,590 – six times more housebuilders, at 187,400, and nearly four times more plumbers, at 107,000.

Gaining in confidence

Due to the wealth of investment information, guides, tools and tips available online for free, DIY investors are getting more confident at managing their own funds and pensions, and are becoming increasingly reluctant to pay someone to give them a hand – especially as there’s little difference between tax wrappers any more.

They’re also increasingly of the mind that fund selection is the only thing that really matters and, as a growing number of advisers simply outsource their investment solution anyway, are going straight to the people running the money.

IFAs, in short, are being cut out of the picture. Reflecting this, a recent report from MGM Advantage found that more than a third of adults aged 55+ say they would not value financial advice when retiring. They simply don’t think that going to a professional is worth the money.

But for many people, forgoing paid-for advice can often prove a false economy as their lost profits far outweigh the cost of IFA fees.

Faced with a bewildering choice of products, those with limited experience often opt for the cheapest fund, the most recognisable name, the latest ‘big thing’, or lock into an appalling annuity product, and it can cost them dearly.

Going it alone?

I’ll admit that paying for investment advice is not for everyone. Many people will continue to manage their own portfolios and do very well.

Their view is often that the adviser knows as little as they do about the future performance of funds and, given that fund choice is the most crucial thing of all, they may as well go it alone.

But others will continue to seek advice because they’re broadly in agreement with what Hugh Mullen, former UK managing director at Fidelity Worldwide Investment, said back in 2013:

“Most people wouldn’t dream of repairing their own car or fixing their own plumbing and would instead opt for a trained professional. Shouldn’t the same apply when it comes to taking financial advice about some of the most important decisions in a person’s life?”

IFAs and many others, including myself, fall into the latter camp. But I suspect that younger people, confident in their ability to research and invest online, will increasingly be inclined to go it alone.

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4 thoughts on “The Rise and Risks of DIY investing

  • Kara, excellent article and one that is extremely relevant for me.

    I am in my 30s and I have often pondered this dilemma. As a “younger person” I am increasingly talking to people in the 30s and I don’t think many people are doing anything online or offline.

    I don’t think many appreciate how much they need to be saving towards a retirement. Who thinks about this in their 30s? 20-30 years ago, you wouldn’t have to worry about it, you worked hard, stashed some money away and your pension was paid automatically and many of the clients of our firm are built on this foundation and these are great clients to have. This won’t be the case in the next 20-30 years. Every individual decision made will have an effect on your long term future and potentially your wealth.

    So I believe the future of financial advice will fall into two categories of people;.

    There are those that know everything and go and do it themselves (we have all come across this client). They don’t trust anyone to do the job for them as it is their money and why would they pay someone a fee when they have all the tools on google. This is an increasing number and good luck to these people. I have nothing against them, some will be successful.

    The other category understand that if they focus all their energy and focus into building their wealth for their family and partner with a good financial planner, then they can both work together and extract as much value from their employment future and place this wealth into their families future. After all we work to live don’t we? Surely that is worth paying for? If someone is going to help me at every big decision point (not just about finances sometimes) then I personally would find that a great help so I am assuming many others will.

    I believe that there will always be people that get what good financial planners do and those that don’t, that won’t change and why should it? You will always have people that will try to fix their cars or plumbing themselves and some will do a good job and some won’t. That is life and as a young financial planner I have accepted that and I would prefer to work with the people that get it.

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  • I agree, Kara, and believe that financial advice and/or planning has a limited shelf life as a profession, perhaps only another 20-30 years as the Baby Boomer generation reaches retirement.

    Perhaps a little longer as these individuals continue to live for another 20-30 years. Once wealth cascades to the next generation, however, the role for the financial adviser will be limited at best.

    This isn’t really a problem, of course. You point out how few IFAs there are relative to plumbers. Have you ever tried to get a plumber?! As IFAs, we’re in an environment of soaring demand for our services and falling capacity in the market.

    Despite only a small percentage of prospective clients needing and wanting our professional services, there are more than enough to keep me and my peers in highly profitable businesses for the rest of my working life.

    Other investors can DIY invest or gamble their retirement savings on the guidance they get from MAS. Best of luck to them.

    At the end of the day though, at least we’re not in an entirely doomed profession. Journalism, for example.

    Reply
  • I do wonder what the point of journalists is, particularly freelance ones (i.e. they cant get a job).

    When I was younger, a journalist used to go off and find something out, then report about it in a knowledgeable fashion.

    Like many others, Kara has written a load of “controversial” claptrap, then spent 10 minutes on the internet finding some tosh to back it up. Comparing a snapshot of the number of financial advisers to the number of car mechanics is a basic error, which doesnt need explaining. But if I owned a newspaper, I wouldnt want to employ anyone who thought that it was a useful statistic.

    People dont buy newspapers or pay for internet content, as quality has been replaced by quality. Perhaps Kara should consider snooping on the phone lines of IFAs and listening into our voicemail messages – I think she would find that IFAs are held in high regard by their clients, and that there are many successful IFAs out there. Maybe that would be more “controversial” or “interesting” than the usual negative rubbish.

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  • Great piece Kara and doing exactly what it should be doing – stimulating discussion.

    There are several issues your piece got me thinking about:

    1.) The investment piece on its own is relatively simple and is being commoditised. Robo-advisers as they are called in the US (online investment services in effect) provide a cheap way for DIY investors without great knowledge to achieve a decent outcome. They are charging 20 basis points as a headline cost. Why wouldn’t some people go for that?

    2.) The evidence on DIY investors actual success is more mixed. Market downturns often educate the DIY’ers the hard way, but they only roll around every 7-10 years so advisers put up with years of stick from each new investing generation until they gain some experience.

    One of the benefits of an adviser that new investors don’t get is in helping them overcome their emotional human foibles. The behavioural finance stuff is not sexy to market to clients, but experienced investors who’ve worked with an adviser through market volatility will appreciate the value destruction this has helped them avoid.

    3.) Most advisers are 50+ and not really making much effort to understand the next generations issues. In fact they can be a little dismissive. For now that’s not a major issue as their money is still coming in from the generation that owns most of it, the baby boomers. However, clearly this will become an issue and businesses that are not making some effort to understand the next generation may find themselves in trouble down the road.

    It’s all so exciting if you ask me. Things are changing and this brings threats and opportunities as usual. Bring it on.

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