# How can a financial adviser give good long-term investment advice to a client who is risk averse?



## Colm Fagan (27 Jul 2021)

@Brendan Burgess Brendan, I accept your decision to edit my posts questioning posters' motivations for continually doubting the reasonableness of my approach.  However, I think it's worth asking for views - probably in a separate thread - on the challenge for financial/ pension advisers, aside from 'housekeeping' matters, such as questions on tax relief, quality of service from different institutions, etc.   For example, is there any truth in my assertion earlier in this thread that one of the adviser's biggest challenges is to persuade clients to overcome their natural loss aversion, and invest in so-called 'risky' but hopefully higher-return assets if they have a long investment horizon.   At least that is what one adviser, who is quite active on this site and for whom I have a lot of respect, once told me.  Some other advisers apparently don't share his perspective and seem to be even more risk averse than their clients.  I wonder if that is due to the phenomenon I mentioned earlier in this thread, that their risk-return payoff is quite different from that of their clients:  they are in trouble with the client if the investment they recommend goes down in value, but the client is likely to give themselves part (at least!) of the credit if its value increases.  That risk-return payoff would make me think twice about recommending so-called 'risky' investments if I were a financial adviser.  How does the good adviser overcome it?


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## Brendan Burgess (27 Jul 2021)

Hi Colm
Good question. I have moved it to a new thread. Feel free to edit the title, if it does not summarise your point correctly.

Brendan


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## Brendan Burgess (27 Jul 2021)

I was very surprised by this comment by Marc in the other thread.



Marc said:


> one might be willing to assume a high degree of investment risk (risk tolerance) but objectively what matters most and certainly from a regulatory perspective is an objective assessment of one’s ability to bear losses (risk capacity) many people will find with the benefit of hindsight that buying an annuity at outset may well have been a better decision.
> 
> In court any financial professional who was found to have “advised” their clients to pursue such a, from a fiduciary perspective, reckless approach, would be Judged by international standards of jurisprudence which ordinarily demand of professional advisers a more diversified investment strategy. Colm, a retired Actuary should be aware of this legal fact.



I think it's reasonable for Marc and me to disagree on investment strategy.  I respect his views, even if I disagree with them. 

Have a look at that thread, and there are well informed people arriving at opposite conclusions. 

Imagine if I advised someone to invest 100% in equities at aged 65 and there was a sustained fall over the next 5 years. They ditch me as an advisor and go to Marc. Marc says that my advice was negligent.  And the client sues me. 

How could a judge make an informed decision?  Experts on both sides would come to different conclusions. 

It probably would be much safer to say invest 50% in equities and 50% in bonds. Or buy an annuity.  If inflation wipes out the annuity, I doubt you could sue the advisor.

There used to be an expression "No IT manager ever got fired for choosing IBM." It's a bit like that.

Brendan


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## Marc (27 Jul 2021)

@Brendan Burgess

For the avoidance of doubt I did not say at any point in the thread referred to that I was conservative, risk adverse or against having an equity bias over the long term. Quite the opposite, I genuinely believe that many investors are, to use a phrase coined during a systematic investigation by HM Treasury in the UK, "recklessly conservative"

*Exhibit A *









						Managing cash in a low interest rate environment Managing cash deposits in a low interest rate envi
					

This guide considers the role that cash or short-term high quality fixed interest (also known as bonds) plays in every investors portfolio




					viewer.joomag.com
				




Clearly an equity biased portfolio makes sense over the long term but as Keynes said; "in the long run we are all dead"


My specific issue is with the casual way in which a 100% equity portfolio (which it turns out is just 12 stocks which is frankly insane) is promoted by yourself and others as suitable and appropriate for the lay investor and specifically in the context of a post retirement income portfolio.

For many investors a 100% equity portfolio is objectively imprudent as they simply lack the *capacity for loss

example*

Let’s say that 5 investor's each have an objective of an annual gross return of €20,000pa




*Investment Portfolio**Required investment return**Risk definition*Investor A€100,00020%Extremely high riskInvestor B€250,0008%paHigh riskInvestor C€500,0004%paMedium riskInvestor D€1m2%paLow riskInvestor E€5m0.4%paVery low risk


Each investor has exactly the same income objective, but the investment risk associated with this objective is directly related to *their* starting capital. It has nothing to do with their risk tolerance or willingness to take the required risk to achieve the objective. It is simply a mathematical fact that someone with €5m needs to take less investment risk in order to achieve the same investment income as someone with less money.


So, whilst it might be ok for you and others to take on a 100% equity portfolio so that a 50% drop might leave you with say €500 grand. You might be badly bruised but you can probably survive.

Its not acceptable to take that personal perspective and apply it to the population at large when providing financial advice. Your sample of one is virtually irrelevant. You might be lucky, but luck isn't a good investment strategy or we would all just go to Vegas!

*How risky is the market?*

I went to great lengths to spell this out in the thread and there is over 100 years of data in the attached guide.

Here is an example

By way of an example using the US Market for the period January 1929 to December 1938

The annualised return of the US Market over this period was -0.89%pa a total return of -8.52%

However, the cumulative return to the end of 1932 was -64.22% that's losing 22.66%pa for 4 years.

That means a million invested at the start of 1929 was worth around 360,000 by the end of 1932!!

You would need a return of 278% just to get back to where you started just 4 years earlier.


*How risky are individual stocks?*

A very poorly diversified collection of just 12 Stocks is even more risky than the market since any individual company can, and frequently does, go to ZERO value.

[broken link removed]


*What view do the courts take?*

For many years we have been guided by the test of the man or woman on the Clapham Omnibus, established in the Court of Appeal, re Whiteley 1886



> “_as  an  ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide_”



This has been further evolved over the years in many countries and in some cases legislation has been written to enforce prudence.
For example the Prudent Investment Rule 1992 in the USA states



> *Sound diversification*_ is fundamental to risk management and is therefore ordinarily required of trustees._
> _Risk and return are so directly related that trustees have a duty to analyse and make conscious decisions concerning the levels of risk appropriate to the purposes, distribution requirements, and other circumstances of the trusts they administer._
> _Trustees have a duty to avoid fees, transaction costs and other expenses that are not justified by the needs and realistic objectives of the trust’s investment program._
> _The  fiduciary  duty  of  impartiality  requires  a  balancing  of  the  elements  of  return  between production of current income and the protection of purchasing power._
> _Trustees may have a duty as well as the authority to delegate as prudent investors would._


“Restatement of the Law, Trust, Prudent Investor Rule” published in the USA in 1992

So, the subject of this thread now seems to have changed from "what is wrong with a 100% equity portfolio?" to "how do you advise a conservative saver to invest some of their money?"

talk about two ends of the spectrum!

*So back to exhibit A*









						Managing cash in a low interest rate environment Managing cash deposits in a low interest rate envi
					

This guide considers the role that cash or short-term high quality fixed interest (also known as bonds) plays in every investors portfolio




					viewer.joomag.com
				




*appropriate benchmarking*

An important factor when considering how successful an investment adviser has been at getting a client to follow and act upon prudent advice is to assign a risk appropriate benchmark for comparison purposes.

The goal of a client will never be to track a random index such as the Dow Jones or to make the highest return in an annual Micky measuring contest.

Prudent investors in retirement work out how much they need to support their lifestyle and therefore how much income their portfolio needs to generate, their adviser then works out what portfolio has that expected return and benchmarks their performance to the annual required return of the client rather than some arbitrary benchmark or the increasingly common approach of ESMA risk bands









						Do You Need to Review Your ARF Strategy? - Everlake
					

More people invest in an Approved Retirement Fund (ARF), over the certainty of an annuity. But do you need to review your ARF strategy?




					globalwealth.ie
				




Using this approach means that the painting by numbers risk profile approach









						Considerations for Investor Risk Profiling - Everlake
					

When constructing investment portfolios, it is essential that we understand risk tolerance, AS WELL as capacity and risk required.




					globalwealth.ie
				




is thrown out and replaced by a more appropriate client-centric advice process.









						In Search of the Perfect Investment Portfolio - Everlake
					

Many investors find it difficult to achieve returns offered by the markets due to a misunderstanding of investment risk, costs and taxes.




					globalwealth.ie
				




“Ignorance more frequently begets confidence than does knowledge: it is those who know little, and not those who know much, who so positively assert that this or that problem will never be solved by science.” Charles Darwin


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## Steven Barrett (27 Jul 2021)

Colm Fagan said:


> @Brendan Burgess Brendan, I accept your decision to edit my posts questioning posters' motivations for continually doubting the reasonableness of my approach.  However, I think it's worth asking for views - probably in a separate thread - on the challenge for financial/ pension advisers, aside from 'housekeeping' matters, such as questions on tax relief, quality of service from different institutions, etc.   For example,* is there any truth in my assertion earlier in this thread that one of the adviser's biggest challenges is to persuade clients to overcome their natural loss aversion, and invest in so-called 'risky' but hopefully higher-return assets if they have a long investment horizon.*   At least that is what one adviser, who is quite active on this site and for whom I have a lot of respect, once told me.  Some other advisers apparently don't share his perspective and seem to be even more risk averse than their clients.  I wonder if that is due to the phenomenon I mentioned earlier in this thread, that their risk-return payoff is quite different from that of their clients:  they are in trouble with the client if the investment they recommend goes down in value, but the client is likely to give themselves part (at least!) of the credit if its value increases.  That risk-return payoff would make me think twice about recommending so-called 'risky' investments if I were a financial adviser.  How does the good adviser overcome it?



I haven't been keeping up with the original thread due to having to do the day job and then seeing it is now on page 7 and a lot of reading is required to get up to speed. So thank you Brendan for making a brand new thread!

The problem Colm is advisors not getting an understanding of what a client's perception of risk is. I always ask a client what they think investment risk is. The majority say losing all their money and not getting it back. Once you explain to them that this doesn't really happen (although I spoke to someone yesterday who has been "advised" to release equity in his home and business premises and invest it in ventures that went bust. He now can't retire because of the levels of debt he still has) and that what the industry calls risky is investing in the likes of Apple, Microsoft etc they are more comfortable. But that does not mean that your money is safe, indexes have fallen by -45% in the past, even with the big companies in it. It's just they have come back. 

I do get people referring to what happened to Bank of Ireland and AIB, the "blue chip" stocks and I have to explain that they were never blue chip and were always actually higher risk, smaller companies that should have never been described as blue chip. 

I agree with Marc on capacity for loss and it is something that I always go through with clients, showing them the value of their money in past crashes (% falls don't have the same impact of saying "Your €1m ARF would be worth €585,000 if an equivalent crash happened yesterday". 

A lot of investment advice these days is automated and driven from the results of a flawed, risk profiling questionnaire that the client completes and the life company produces an instant recommendation and report off the back of it that is white labelled with the advisors logo. They don't take the client's actually wants and needs into account. 

But to be honest, I don't have any issue with clients being invested in equities but none of my ARF clients are 100% equities.  

Steven
www.bluewaterfp.ie


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## PMU (27 Jul 2021)

Possibly because it may not be in the best interest of their clients.





						Key Post - "Should the elderly be less conservative investors?"
					

Most older people will not invest in equities, although it's the correct thing to do. Advisers should advise them of the right thing to do, even if the client decides against it. I would be happy to take on any bet with a positive expectation which risks less than say 1% of my wealth. My granny...



					www.askaboutmoney.com


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## DublinHead54 (27 Jul 2021)

The stock market has performed well in recent years since the financial crisis, but past performance does not guarantee future performance. If you are accepting risky assets in retirement to achieve your required level of income then you are living beyond your means in my opinion. This is no different in my opinion to the advice given to posters on this forum who are carrying a large amount of mortgage and or personal debt.


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## GSheehy (27 Jul 2021)

The number of PRSA/Pension (pre/post retirement) applications I'd see, on an 'execution only' basis, with 100% equity only fund selections would be very small. So, no adviser input. And, even at that, it's likely that those clients may not be relying on a pension product as their only retirement asset or that the decison on risk/fund may have been made by a couple who will rely on the income from it.

That said, the (current) No. 1 fund (by AUM) on my main agency would have an indicative equity range of 75%/100% - mixed fund with balance in bonds/cash.

Gerard

www.prsa.ie


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## Colm Fagan (27 Jul 2021)

@Brendan Burgess   I don't think the title adequately reflects how I would like the discussion to develop.  Maybe something on the lines of "How can a financial adviser give good long-term investment advice to a client who is risk averse?" would be more appropriate. 
I'll start the ball rolling.  Because of my background in finance and my (supposed) knowledge of investments, family and friends sometimes ask me where they should invest their nest egg.   My first (and second and last) inclination is to run a mile, because I know I'm on a hiding to nothing.  There's no upside for me if whatever I advise does well, but my family member/ friend will think I'm either a fool or a knave if it does badly - which is always a possibility, even for the most carefully chosen investment.  If I were forced to make a recommendation (which I have invariably managed to avoid up to now), I would probably try to find something with some potential upside but limited downside.  I wouldn't touch one of those products with a barge pole for my own portfolio, because I know they have rotten payoffs, so I really would be a knave if I ended up recommending such a product to a friend!
I am interested to learn how professional advisers address the problem.  I fear that some of them do precisely what I would do if forced into a corner.  It's a sad lookout for clients if that's what happens in practice.


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## Brendan Burgess (27 Jul 2021)

Hi Colm
I am in the same situation as you are. I am not a professional advisor but am sometimes asked by people where they should invest.

I give them a disclaimer first.
Then I set out the options and highlight that cash is not risk-free. If they are risk averse, they should be avoiding cash.

But they usually end up in Savings Certs anyway.

Oddly enough, even if they have a mortgage, they don't want to clear the mortgage first.



Brendan


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## Conan (27 Jul 2021)

Many advisers are on a “hiding to nothing” in this scenario. They know that if they recommend a particular strategy (even after interrogating the client as to their attitude to risk) and it works out, then the client is likely to claim some/most of the credit, but if it doesn’t work out then the advisor is fully to blame. So most will tend to favour a “middle of the road” strategy, thus ensuring that at least they won’t end up at the bottom of some league table. When it comes to a client “attitude to risk” , then I like Warren Buffet’s quote - “you only find out which swimmer is wearing trunks, when the tide goes out”. Most investors are happy to take risk when the markets are going up, but less happy to do so on the way down.


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## FintanJ (27 Jul 2021)

A financial advisor can only advise. It is individual decision as to level of investment risk. A financial advisor can do excellent job but client makes overly conservative decision. 

Is the real question not the importance of population understanding what is investment risk, the different levels of risk , different types of risk. Example, I would guess a lot of people focus on risk of drop in value of investments but less focus on inflation. Is financial advisor expected to provide investment education course?


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## NoRegretsCoyote (28 Jul 2021)

Brendan Burgess said:


> Imagine if I advised someone to invest 100% in equities at aged 65 and there was a sustained fall over the next 5 years. They ditch me as an advisor and go to Marc. Marc says that my advice was negligent. And the client sues me.
> 
> How could a judge make an informed decision? Experts on both sides would come to different conclusions.


Can you sue someone in Ireland for poor investment advice?


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## Marc (28 Jul 2021)

NoRegretsCoyote said:


> Can you sue someone in Ireland for poor investment advice?



You would need to show that they had been reckless or negligent. 

"The term professional negligence relates to any industry in which a professional fails in his or her duty of care towards you. ... You can claim compensation for professional negligence if it can be *proven* that you have suffered a loss if the service you received was less than that which would be reasonably expected."


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## SGWidow (28 Jul 2021)

Colm Fagan said:


> I'll start the ball rolling.  Because of my background in finance and my (supposed) knowledge of investments, family and friends sometimes ask me where they should invest their nest egg.   My first (and second and last) inclination is to run a mile, because I know I'm on a hiding to nothing.  There's no upside for me if whatever I advise does well, but my family member/ friend will think I'm either a fool or a knave if it does badly - which is always a possibility, even for the most carefully chosen investment.



Hi Colm,

I enjoy your posts but...…..

You've got me all confused! The gist of the above is that you want to avoid, at all costs, the game in which "eaten bread is soon forgotten" but when folk lose "bread" (readies), it's always remembered. I can get this!

What I'm struggling with is that if this is truly your _first, second and last_ - why the dickens did you write the Investor Diary - as in surely there was a much easier way to achieve your supposed primary objective?! And why would you promote concentrated all-in equity portfolio for folks' retirement savings - sooner or later, people will pick the wrong concentration or equities generally will flounder? At such times, guess who will be remembered?!

Whilst I'm at it, I can't proclaim to have read every post in the other interesting thread - so apologies if this is inaccurate - but there seems to me 2 aspects of your ARF strategy that needs to be borne in mind by Joe or Josie Public. I have the impression, rightly or wrongly, that these points do not come across clearly in your posts.

1. Most folk will not be running their own equity portfolio - i.e. they will be investing in an equity fund of some type. Hence, they will not have dividend income. Hence again, even if the premise is accepted that dividends help with sequence risk, such protection will not apply as they will be obliged to sell equities at depressed levels.

2. The "tightening your belt" in tough times is well and good for affluent old actuaries - but Josie Public may have substantially less wiggle room.


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## Steven Barrett (28 Jul 2021)

Marc said:


> You would need to show that they had been reckless or negligent.
> 
> "The term professional negligence relates to any industry in which a professional fails in his or her duty of care towards you. ... You can claim compensation for professional negligence if it can be *proven* that you have suffered a loss if the service you received was less than that which would be reasonably expected."


Even still. 

Well known firm in Dublin were advising clients to release equity in their homes and invest the money in products that ultimately failed and the clients were left with nothing but debt. The firm closed, those involved moved on and nothing happened. 

Only reminded of this as I was contacted recently by someone who took their advice and is nearing retirement age, is on interest only loans on home and commercial mortgages. A total mess. 



Conan said:


> Most investors are happy to take risk when the markets are going up, but less happy to do so on the way down.



No one ever rings me and complains that they are making too much money! 

Steven
www.bluewaterfp.ie


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## Steven Barrett (28 Jul 2021)

FintanJ said:


> A financial advisor can only advise. It is individual decision as to level of investment risk. A financial advisor can do excellent job but client makes overly conservative decision.
> 
> *Is the real question not the importance of population understanding what is investment risk, the different levels of risk , different types of risk. Example, I would guess a lot of people focus on risk of drop in value of investments but less focus on inflation. Is financial advisor expected to provide investment education course?*


People need to understand where their money is. They don't have to understand the ins and outs of investing but they need to know what kind of companies they are invested in and what kind of bonds they have. Some people have a keen interest in it to others who just tell you to make the decision. 

I liken it to me and cars. I drop my car into the mechanic to service. He could show me what he has done but I don't care. I pay him to make sure it's fixed and won't break down. Others will be under the hood with him. 

As an advisor, we have a responsibility to take care with our clients money and that means avoiding unnecessary risk (I won't recommend anything with borrowing). Unfortunately, too many advisors are nothing but salesmen after large commissions and are more working for product providers than they are for the people they are supposed to advise. 

And when things get bad and the value of their investments fall, communication is key. Talking to clients and letting them know what is going on and this was always going to happen at some stage, we just didn't know what it was going to look like. 


Steven
www.bluewaterfp.ie


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## Colm Fagan (28 Jul 2021)

SGWidow said:


> What I'm struggling with is that if this is truly your _first, second and last_ - why the dickens did you write the Investor Diary - as in surely there was a much easier way to achieve your supposed primary objective?!


I don't get your point.  I'm very happy to set out my own experience.  I am not advising anyone to do as I did.  In fact, I've told lots of stories of my  investment disasters over the years, from which people will surely take the message that they could be far better off NOT doing as I've done! While I'm on the subject of recounting experiences, it would be great if some real life financial advisers could share (anonymously, of course) some of the (good and bad) experiences of their clients, so that we could learn from them.   For example, I don't think there is anything available at market level, setting out what ARF investors have actually earned (after fees and commissions) over the last (say) 3, 5, 10 years.   I've given the figures for my ARF.  It would be lovely to hear from advisers the range of returns (net of all fees) earned by their clients.  

I think I've told the story of the origins of my investor's diary already.  Anyway, here it is again.  After making a couple of disastrous investments, I concluded that I would not have made such cock-ups if I had written a little note to myself beforehand, setting out why I planned to buy that particular investment.  I was writing those notes to myself for a while.  Then I thought that other people might find them interesting, so I published them more widely.  I was lucky to get the Sunday Times to run with them for a while, but that was just a bonus.  Now what's your point about there being a "much easier way to achieve my supposed primary objective?"  What do you think my primary objective is?  (As an aside, writing about planned investments in advance didn't prevent me making more bad choices, but I do think it reduced their incidence).  


SGWidow said:


> And why would you promote concentrated all-in equity portfolio for folks' retirement savings - sooner or later, people will pick the wrong concentration or equities generally will flounder? At such times, guess who will be remembered?!


As I've said many times, I am NOT advising others to do as I've done.  I'm simply recounting my experience.  You probably would have a point if I wrote exclusively about wonderful investment coups that I've pulled off, but I haven't.  I've probably written more about poor investments than about good ones.  If there is a lesson I want to impart more generally, it is that "real" investing is not about fluctuating prices of unit-linked funds.  It's about putting my money in real businesses and leaving it there for a long time if possible.  


SGWidow said:


> Most folk will not be running their own equity portfolio - i.e. they will be investing in an equity fund of some type. Hence, they will not have dividend income. Hence again, even if the premise is accepted that dividends help with sequence risk, such protection will not apply as they will be obliged to sell equities at depressed levels.


Yes, I have made those points numerous times, maybe not in this thread.  It is also worth adding that people who don't run their own portfolios suffer much higher charges than I've incurred - and those charges are experienced at all levels.  On this subject, there were some frightening revelations of high charges by advisers and insurance companies in today's and yesterday's "The Currency".  Well worth reading.  


SGWidow said:


> The "tightening your belt" in tough times is well and good for affluent old actuaries - but Josie Public may have substantially less wiggle room.


I agree with you on that.  I think it was in this thread that I mentioned the contributor to the discussion on my January auto-enrolment paper who asserted that it was fine for affluent people like myself (and Seamus Creedon, who opened the discussion) to invest our money in expected-high-return equities, but that it was wrong to give the same advice to the less affluent, that they should be consigned instead to low-return bonds.  The entire purpose of my auto-enrolment paper was to allow less affluent pension savers to enjoy the fruits of the higher returns from equities throughout their entire lives (including all through retirement) at volatility levels comparable to high-interest deposit accounts.  I'm hoping that, eventually, the penny will drop that I am right and that the approach I'm advocating will be introduced.  Based on what I've read in "The Currency" it cannot happen soon enough.  


SGWidow said:


> You've got me all confused!


I hope that I've unconfused you!


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## Duke of Marmalade (28 Jul 2021)

I am not a professional financial advisor but my career was in financial services.
A couple of years back some ex colleagues of Zurich Life came to me for "advice" on their offer of an enhanced transfer value of their deferred pension.  I cobbled together a spreadsheet to allow them play with the possibilities.   Not surprisingly they all went for the ETV (money in the hand much more desirable than a pension which was guaranteed to be doubled (3% p.a.) in their 80s).
The next bit was where should they invest the money?  They were being offered a choice of Zurich's Prisma funds risk rated from 2 to 7 at subsidised AMC.   My first almost subconscious piece of advice was that there was no point in looking at alternative fund managers - the subsidised AMC trumped any spurious alpha differentiation.
Zurich gave an indication of the potential returns and volatility of the various risk rating choices and I accepted them at face value and fitted them to a lognormal model (@Marc ).  I let them play with the spreadsheet to get a sense of what the various choices meant in terms of the Quartile distribution of future year by year pay-outs.  They had a facility to input a one off fall in equity values which the spreadsheet converted to the impact on the chosen risk rated fund.
So in the round I saw myself as informing not advising and I note the following points:
1)  Ex ante differentiation of fund managers is spurious except as regards their charges
2)  It was not for me to persuade them to take risks they don't want to take - but merely to let them have a good sense of the risks
3)  I carefully avoided conveying my own instinct that markets were in bubble territory - a view that I have had for as long as Colm has been cleaning up!  But they are clued in enough themselves to have a broad awareness of stockmarkets and their recent performance and potential for "crash".  I let them test their fears  (though I admit the spreadsheet as shipped had a 30% one off fall as its input).
4)  I didn't bother them at all with the annuity option.  I suppose that is advice but considering they had accepted the ETV it would be silly to reverse back into a lesser annuity.  I did give a facility to annuitise at older ages.

As a separate point each of my advisees would probably be thinking in terms of leaving the family home to their estate but not much else and they were aware that in switching from pension to ARF the possibility of "windfall" inheritances arose.
This highlights how important personal circumstances are.  I suspect that Colm's "good luck" is really good luck for his kids.  Does he consult them on his investment strategy?  At the other end of the scale someone investing 100% in equities may be risking being unable to keep a car but in the expectation that if equities behave themselves they might be able to trade up from a Ford to a Tesla.  Utility considerations are paramount in making these risk reward trade offs.


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## Duke of Marmalade (28 Jul 2021)

SGWidow said:


> 1. Most folk will not be running their own equity portfolio - i.e. they will be investing in an equity fund of some type. Hence, they will not have dividend income. Hence again, even if the premise is accepted that dividends help with sequence risk, such protection will not apply as they will be obliged to sell equities at depressed levels.


I don't think that is entirely correct.  Let's say the internal dividend earnings of the fund are 2.5%.  These are reinvested.  Now a 2.5% withdrawal is simply reversing that reinvestment.  There are of course timing and other differences but the broad effect is similar to the dividends having been distributed.  As a further thought one observes that a reinvesting fund is rather inefficient for people in the withdrawal phase.


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## AJAM (28 Jul 2021)

Duke of Marmalade said:


> I am not a professional financial advisor but my career was in financial services.
> A couple of years back some ex colleagues of Zurich Life came to me for "advice" on their offer of an enhanced transfer value of their deferred pension.  I cobbled together a spreadsheet to allow them play with the possibilities.   Not surprisingly they all went for the ETV (money in the hand much more desirable than a pension which was guaranteed to be doubled (3% p.a.) in their 80s).
> The next bit was where should they invest the money?  They were being offered a choice of Zurich's Prisma funds risk rated from 2 to 7 at subsidised AMC.   My first almost subconscious piece of advice was that there was no point in looking at alternative fund managers - the subsidised AMC trumped any spurious alpha differentiation.
> Zurich gave an indication of the potential returns and volatility of the various risk rating choices and I accepted them at face value and fitted them to a lognormal model (@Marc ).  I let them play with the spreadsheet to get a sense of what the various choices meant in terms of the Quartile distribution of future year by year pay-outs.  They had a facility to input a one off fall in equity values which the spreadsheet converted to the impact on the chosen risk rated fund.
> ...



Great post Duke. I think you're approach is right. Financial advisors should be educating and informing their clients to allow them to make their own decision. The starting point should be "What is your Goal" and "What is your Time horizon"
Most punters will default to the eye roll inducing "I want high returns with low risk"! But if you make them get specific instead of general..... "I want to retire at 60 with 45K per annum income." Now you an put a model together to show them how to reach that goal, and from there you can explain the risks associated with that model.

It's up to them then if they are willing to take the risks. But at least they understand both sets of risk i.e. you need to take on investment risk to have any chance of making your goal vs you can reduce your investment risk, but by doing so you increase the risk of not meeting your goal.

So that's my answer to the Title Post Question. How can a financial adviser give good long-term investment advice to a client who is risk averse?
You have to tie it to goals and explain with models that you need to balance investment risk with outcome risk.


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## Steven Barrett (28 Jul 2021)

Duke of Marmalade said:


> A couple of years back some ex colleagues of Zurich Life came to me for "advice" on their offer of an *enhanced transfer value* of their deferred pension.


It was a very good offer though, better than any of the others I have seen with an amc that is as low as you can get in the market and something not available through Zurich Life normally.


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## Duke of Marmalade (28 Jul 2021)

Steven Barrett said:


> It was a very good offer though, better than any of the others I have seen with an amc that is as low as you can get in the market and something not available through Zurich Life normally.


Yep, it looked a bit of a no-brainer, even though by comparison with annuity rates it was strictly speaking less than the correct "actuarial" value. 
They also went through the standard Financial Advice process (with Mercer I think, fees paid by Zurich) involving matching risk appetite to risk rating.  While it is easy to criticise this somewhat naive approach I can't actually see how to improve on it.  In the end I think they accepted the Mercer advice of 3 and 4.  Personally, I am not sure which I would have picked.  2 was definitely out.  7 maybe a bit too aggressive.  They were probably well advised.


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## SGWidow (28 Jul 2021)

Duke of Marmalade said:


> I don't think that is entirely correct.  Let's say the internal dividend earnings of the fund are 2.5%.  These are reinvested.  Now a 2.5% withdrawal is simply reversing that reinvestment.  There are of course timing and other differences but the broad effect is similar to the dividends having been distributed.  As a further thought



Hi Duke,

I don't get this!! ……..that is your point that money withdrawn from an equity fund at a depressed price is similar to dividends being distributed (in the way described elsewhere as a risk sequence support.) Here's why - imagine a fund like....

Equities         970,000    (total shares held by the respective share prices, etc.)
Cash                30,000    (dividends and other money floating around)
Fund Value 1,000.000

Say the fund has 10,000 units in total with a unit price of €100. This unit price is made up by €97 and €3 for the equities and cash, respectively.

If I "need" €10, 000...….I must sell 100 units, meaning that my "need" is satisfied by selling €9,700 in equities and €300 in cash!

What am I missing?


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## Marc (28 Jul 2021)

Brendan Burgess said:


> Have a look at that thread, and there are well informed people arriving at opposite conclusions.



who is to judge that the opinions are well informed?


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## Duke of Marmalade (28 Jul 2021)

SGWidow said:


> Hi Duke,
> 
> I don't get this!! ……..that is your point that money withdrawn from an equity fund at a depressed price is similar to dividends being distributed (in the way described elsewhere as a risk sequence support.) Here's why - imagine a fund like....
> 
> ...


Fund is 97% equity, 3% cash from dividends
Fund re-invests 3% cash in equities; now 100% equities
You sell 3% of your units and now hold 97% equities; 3% cash
Exact same position as if fund did not re-invest 3% but distributed directly to you
You have simply reversed the fund’s reinvestment of your dividends


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## Sarenco (28 Jul 2021)

Or to put it another way, failing to reinvest a dividend in the shares that produced the dividend is the same thing economically as selling those shares.

A statement that proved surprisingly controversial on another thread…


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## SGWidow (28 Jul 2021)

I was going to reply along those lines but you beat me to it, Sarenco!

Also, the shares get sold at depressed prices so sequence of risk applies in my example.


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## Duke of Marmalade (28 Jul 2021)

SGWidow said:


> I was going to reply along those lines but you beat me to it, Sarenco!
> 
> Also, the shares get sold at depressed prices so sequence of risk applies in my example.


Your example is not what I am talking about.  I am talking about selling the amount of the internal dividends that were reinvested in which case the shares were bought and sold at the same depressed prices. The prices are totally irrelevant.
 @Sarenco’s comment is total nonsense.  Failing to buy a car is not the same as selling it.


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## SGWidow (29 Jul 2021)

Hi Duke,

I'm going to be busy for the next day or so but will try find the time to explain my position better. Hopefully, this evening.


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## Duke of Marmalade (29 Jul 2021)

SGWidow said:


> Hi Duke,
> 
> I'm going to be busy for the next day or so but will try find the time to explain my position better. Hopefully, this evening.


I am really making an almost trivial point, so it must be my faulty explanations.  I'll try another illustration.
Fund consists of 2 shares;  the look through make-up of my units in the fund is as follows:
Share A valued at 100;  Share B valued at 110; Total value of units 210
Share B pays a 10 dividend leaving the Fund with 100 A, 100 B and 10 Cash
The fund reinvests the 10 equally in A and B and now consists of 105 A, 105 B
I sell 10 of the units and now hold 200 in units plus 10 cash which on look through is 100 in A, 100 in B and 10 in cash
This is the exact same as if the fund had distributed the 10 to me and not bothered with re-investing.  The price at which the re-investment and subsequent reversal of that re-investment by encashing units took place is irrelevant (on the approximate assumption that it is the same price).

I hope this is blindingly obvious.  The more significant point is whether receiving dividends is less vulnerable to sequence risk than selling shares/units, which I addressed in the other thread.  This little rabbit hole is about whether direct investment has an edge over collective investment with re-investment of dividends.  At first blush I thought it had and actually made the argument against collective re-invested funds but on reflection the "advantage" is a bit of an illusion.


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## Sarenco (29 Jul 2021)

Duke of Marmalade said:


> I sell 10 of the units and now hold 200 in units plus 10 cash which on look through is 100 in A, 100 in B and 10 in cash
> This is the exact same as if the fund had distributed the 10 to me and not bothered with re-investing


You may not like my phrasing, but that's the exact point I have been trying to make all along.


Duke of Marmalade said:


> At first blush I thought it had and actually made the argument against collective re-invested funds but on reflection the "advantage" is a bit of an illusion


I hadn't appreciated that you had shifted your position in this regard.

It seems that we are in violent agreement.


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## Duke of Marmalade (29 Jul 2021)

Sarenco said:


> It seems that we are in violent agreement.


I hope so


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## Colm Fagan (29 Jul 2021)

Steven Barrett said:


> Once you explain to them that this doesn't really happen ... and that what the industry calls risky is investing in the likes of Apple, Microsoft etc they are more comfortable. But that does not mean that your money is safe, indexes have fallen by -45% in the past, even with the big companies in it. It's just they have come back.,


Steven, I like your approach, which is similar to my own.  The knowledge that I am investing in real, solid businesses allows me to sleep at night.  It would be great if there were more financial advisers like you who could give that sort of reassurance to clients.  
People think I am taking massive risks by putting nearly all my money in equities.  I see it differently.   For example, my biggest ARF holding pays a dividend  of 7% a year (at the current market price).  The dividend hasn't fallen once in the last ten years (at least).  In fact, it has increased by 50% in the period.  The board of directors believes that the dividend is safe for the next 20 years.  I've done a  thorough analysis of its finances.   I agree with that assessment.  In the circumstances, why would I sell part of that holding and put my money instead in a bond that will pay almost zero over the same period?  I would be mad.  I see that particular share as a type of 'bond' .  It just so happens that it pays almost 7% a year more than I could get from a 'real' bond.
OK, there are circumstances where the dividend could fall (although I find them hard to envisage ).  Even if the dividend were to fall, the company would still be solvent.  I accept too that its market value could fall.  For example, its market value fell to about two-thirds of its current value in March last, but I wasn't particularly worried, because the dividend wasn't affected.  At the time, the dividend yield was almost 10%.  I'm sorry now I didn't put more into it at that time.  Some of my ARF is invested in companies which are in completely different businesses and which will be affected by different risks.  It's very unlikely that all of them will experience difficulties at the same time.
I believe firmly that, if financial advisers could persuade their clients to focus more on the fact that, by buying equities, they are investing in real businesses, placing less emphasis on fancy graphs of the type that @Marc produces, their clients would sleep easier at night and would be considerably better off.
So the bottom line when advising people on the merits of equities v bonds is to forget the graphs and focus instead on the fact that an equity investment means investing in real businesses like the ones Steven mentioned in his post.


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## Marc (29 Jul 2021)

There are some posters on here who believe that my posts are directed at them personally and seek to engage in constant mud slinging simply because whatever they did worked for the them. When I am more concerned with providing professional analysis based on statistically significant evidence which has ideally been peer reviewed.

Often these, lets call them facts shall we, don’t fit the narrative of the, often, annoying anonymous troll wishing to pick a fight.

I frequently report posts which are wrong, misleading, irresponsible or reckless and I am frequently told not to report posts I “disagree” with. It’s like reporting someone breaking into someone’s home and being told “leave them alone they probably just want a new TV”

So I now simply block the more offensive posters and don’t engage directly in debate since there are none so deaf as will not hear.

For the avoidance of doubt I’m not against people investing in equities when it is done prudently and sensibly through a suitable, globally diversified collective investment fund.

I am however firmly against poor “advice” being touted to lay investors who might not realise just how flagrantly irresponsible it is.

There is a very substantial difference between being able to identify the winning stocks over the last decade and avoiding the vast majority of stocks which are likely to underperform cash over the next decade - see link at the end of this post.

So there is a very significant difference between investing in a global equity index and buying a collection of companies most of which won’t make more than a bank account.

It is well documented in behavioural finance literature that investors frequently fall into the trap of thinking that because past winners have been so successful that trying to identify the next winning company has to be the right way to invest.

The problem here is just because the past is easily observable doesn’t mean that the future is predictable. The reality is that most companies individually make horrendous investments. Only by purchasing all possible companies are you sure to own the winners of the future. This is the empirical basis of index investing and why the vast majority of investors fail to “beat the market”

The pattern repeated over the whole of my career goes something like this.

“Why do you have all of your money in cash?”
Client ; “I’ve never been lucky with investing. I bought some bank shares and lost my shirt.”

Advisers then have to explain the difference between speculation, gambling and investing. Nursing the battered and bruised clients emotions of regret and loss which are very strong and hard to overcome.

Just imagine how much easier it would be to convince everyone to invest more in risky assets if their experience initially had been a good one?

This is the crux of the issue. A lucky investor pursuing a flawed strategy believes that they are correct because it has worked for them. The danger for society is when they try to recruit followers.

It can’t be said often enough. When you buy the market you can’t lose  everything. When you buy an individual company or a small collection of pet stocks, you absolutely could.


Two very plausible scenarios for anyone pursuing the reckless strategy being touted here.

1) the client loses mental capacity and an enduring power of attorney is triggered. The attorney approaches a financial adviser for advice.
The recommendation is always going to be sell the collection of pet shares and buy a globally diversified portfolio.

2) the client dies and the widow approaches a financial adviser. Same outcome.

Even Warren Buffett has this in his will. Sell 90% of Berkshire Hathaway and put it in an index fund.

This is why you should also avoid Stockbrokers. As Woody Allen said;”a stockbroker is someone who invests other people’s money until it is all gone”

By way of an example here are the fortunes of a sample of real businesses as at May 2020

PG&E
Market value: $7.6 billion

11-year change: -59.8%
First Solar

Market value: $4.6 billion
11-year change: -60%

Murphy Oil
Market value: $2.4 billion
11-year change: -60.5%
Mosaic

Market value: $5.4 billion
11-year change: -64.6%
Devon Energy
Market value: $5.1 billion

11-year change: -65.6%
Marathon Oil

Market value: $5.4 billion
11-year change: -67.8%
Fluor

Market value: $1.2 billion
11-year change: -73.6%
EQT Corp

Market value: $1.6 billion
11-year change: -77.8%
Range resources

Market value: $667.4 million
11-year change: -92.7%
Transocean

Market value: $1.5 billion
11-year change: -95.1%
Chesapeake Energy

Market value: $424.3 million
11-year change: -98.5%
And that’s just in the USA!

Atari, Woolworths, Pan Am, Polaroid; Kodak, Lehman Brothers, Royal Bank of Scotland, Anglo Irish Bank, Bank Of Ireland, AIB all worthless or virtually worthless

BUYING INDIVIDUAL COMPANIES IS NOT INVESTING ITS SPECULATING.

when investing in equities you absolutely must buy a globally diversified  index

[broken link removed]

The irony of a feckin Actuary complaining about “fancy graphs”

_“Ignorance more frequently begets confidence than does knowledge: it is those who know little, and not those who know much, who so positively assert that this or that problem will never be solved by science.” Charles Darwin_


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## Colm Fagan (29 Jul 2021)

And your point is? 
Tell me the story of any of those companies.    You just gave numbers showing market values and changes over a period.  You didn't tell us a blessed thing about any of them.  They are all complete mysteries to me  - and I'm sure they're also a mystery to others who'll read the post.  Was the purpose just to scare people off investing in equities?    I do know the story of the companies Steven mentioned in his post.


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## Steven Barrett (30 Jul 2021)

Colm Fagan said:


> And your point is?
> Tell me the story of any of those companies.    You just gave numbers showing market values and changes over a period.  You didn't tell us a blessed thing about any of them.  They are all complete mysteries to me  - and I'm sure they're also a mystery to others who'll read the post.  Was the purpose just to scare people off investing in equities?  *  I do know the story of the companies Steven mentioned in his post.*


Let's be clear Colm, I am not qualified to pick stocks and don't try to. I outsource that responsibility to the likes of MSCI and S&P who do a great job for me and they don't even bother to invoice me. There may be losers in the 1,600 companies that MSCI have but if they don't fit their criteria, they are gone (I tried reading the [broken link removed] but couldn't understand it The S&P 500 is a lot easier to understand.)


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## Colm Fagan (30 Jul 2021)

@Steven Barrett    I realise that.  My point was that, based on what you wrote earlier, you tell clients the names of some of the companies in which their money will be invested if they choose an equity fund, so that they're not just numbers on a page for them.  They know that their money won't disappear down the tube.  You don't bamboozle them with guff about lognormal distributions, volatility drags, arithmetic versus geometric means, etc.  Even bamboozling themselves.

Yes, I'm different in that I want to relate directly to the companies in which my money is invested, not indirectly through a mutual or unit-linked fund.  I realise that others won't need that comfort to invest in equities.  My ARF is invested in 12 companies.  I have made three transactions in 2021 so far.  My longest-standing investment has been in my portfolio for over 22 years.  I have attended that company's investor days and AGM's and have asked questions of the Board.  I have also written to the Senior Independent Director when I have had governance concerns.
To call that speculating rather than investing is rubbish.


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## Colm Fagan (30 Jul 2021)

Colm Fagan said:


> it would be great if some real life financial advisers could share (anonymously, of course) some of the (good and bad) experiences of their clients, so that we could learn from them. For example, I don't think there is anything available at market level, setting out what ARF investors have actually earned (after fees and commissions) over the last (say) 3, 5, 10 years. I've given the figures for my ARF. It would be lovely to hear from advisers the range of returns (net of all fees) earned by their clients.


Does anyone know if there is reliable data available on what returns people are actually earning on ARF's (and other retail investment products) -  after commission and charges, of course?  There should be a central source of such information.  From my own limited experience of friends and acquaintances telling me of their investment travails, some buyers of ARF's and other pension products haven't seen any growth whatsoever in their investments over a five-year period, some longer.  They were all "advised" by brokers/ financial advisers.  What does that tell us about the quality of advice being dispensed?


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## Steven Barrett (30 Jul 2021)

Colm Fagan said:


> @Steven Barrett    I realise that.  My point was that, based on what you wrote earlier, you tell clients the names of some of the companies in which their money will be invested if they choose an equity fund, so that they're not just numbers on a page for them.  They know that their money won't disappear down the tube.


That is it exactly. Most people have very limited knowledge of investing and so many people in this country either had or know someone who suffered massive losses with the "blue chip" Irish banks. And then there's Eircom as well. When they know the size of the companies they are investing in (Microsoft are almost as big as Ireland!), it puts their mind as rest a bit. 



Colm Fagan said:


> Yes, I'm different in that I want to relate directly to the companies in which my money is invested, not indirectly through a mutual or unit-linked fund.  I realise that others won't need that comfort to invest in equities.  My ARF is invested in 12 companies.  I have made three transactions in 2021 so far.  My longest-standing investment has been in my portfolio for over 22 years.  I have attended that company's investor days and AGM's and have asked questions of the Board.  I have also written to the Senior Independent Director when I have had governance concerns.
> *To call that speculating rather than investing is rubbish.*


Speculating/ gambling - the longer you stay invested, the greater the chance of losing your money. 
Investing - the longer you stay invested, the greater the chance of making money




Colm Fagan said:


> Does anyone know if there is reliable data available on what returns people are actually earning on ARF's (and other retail investment products) -  after commission and charges, of course?  There should be a central source of such information.  From my own limited experience of friends and acquaintances telling me of their investment travails, some buyers of ARF's and other pension products haven't seen any growth whatsoever in their investments over a five-year period, some longer.  They were all "advised" by brokers/ financial advisers.  What does that tell us about the quality of advice being dispensed?


Most of my ARF clients are up on their initial investments. The vast majority are prudent in their withdrawals, keeping it at 4% or 5%. Those who are down are only slightly down after years of making withdrawals and have no fear of running out of money. These would have a more conservative approach to investing and they are happy with it. 

I did a review last week for a client who invested €1.5m in his ARF in 2008. His ARF just creeped over €2m when we reviewed it and he has taken €900k from the ARF. He had a decent chunk in Tech funds from the off so has benefited hugely. And as I said to him, the returns are not down to me as I told him to take a more conservative approach based on him continuously telling me he was a low risk taker (he's not really, he just says he is). Now, this client had a large slice of luck with timinig and has other assets as a safety net, so he would have been alright. 

It's a lot different doing tricks on the trapeze when they take the net away!


Steven
www.bluewaterfp.ie


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## Marc (30 Jul 2021)

Its very easy to post anonymous client returns but I'm not sure its much use without some context

*ARF 1*


















*ARF 2









*







Here is a client portfolio bench marked against the ARC Balanced Index






A different portfolio against the ARC Steady Growth Private Client Index 






A more detailed and extensive net of costs analysis can be found here









						In Search of the Perfect Investment Portfolio - Everlake
					

Many investors find it difficult to achieve returns offered by the markets due to a misunderstanding of investment risk, costs and taxes.




					globalwealth.ie


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## Colm Fagan (30 Jul 2021)

Thanks @Marc and @Steven Barrett for posting some results for clients.  In fairness, I don't expect individual advisers to publish results for their clients.  This is something that should be done at central level.  The Pensions Authority or the CBI could probably mandate it.  At the very least, each QFM should be required to keep information on performance (net of fees and commissions) for the ARF's they manage.


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## GSheehy (30 Jul 2021)

Colm Fagan said:


> Does anyone know if there is reliable data available on what returns people are actually earning on ARF's (and other retail investment products) -  after commission and charges, of course?  There should be a central source of such information.  From my own limited experience of friends and acquaintances telling me of their investment travails, some buyers of ARF's and other pension products haven't seen any growth whatsoever in their investments over a five-year period, some longer.  They were all "advised" by brokers/ financial advisers.  What does that tell us about the quality of advice being dispensed?



This (from Rubicon Investment Consulting) is about as close as you'll get for a comparison on multi-asset or mixed funds. I'm sure that Rubicon would insist on some sort of conformity with what % (if any) of the AMC is included in the prices that are submitted by the providers and whether those prices are gross/net of other ongoing charges and portfolio transaction costs. 

What providers and fund/s are your friends and acquaintances invested in? 

Gerard

www.prsa.ie


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## Colm Fagan (30 Jul 2021)

@GSheehy   Thanks Gerard.  I'm aware of that offering from Rubicon Consulting but it doesn't allow for the actual funds that clients choose; neither does it allow for other charges by providers and intermediaries.  I'm simply looking for what I'm sure every client wants to see:  I invested X on such-and-such a date.  I withdrew Y.  Now the remaining balance is worth Z.  All figures net of fees and commissions.


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## Duke of Marmalade (30 Jul 2021)

@Marc In section 4.3 (Page 36) of your presentation guide - "Demonstrating our value..." - you produce an interesting table on the matrix of risks of bomb-out by initial drawdown and chosen fund.  I would like to critique this table but would appreciate a picture of it to make my points readable.  Can you post such a picture?  Also I note it is sourced from Portfoliometrix Asset Management.  Can I get a bit more detail on how it was constructed, volatility assumptions etc.?


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## Firefly (30 Jul 2021)

Interesting discussion. My 2c as a Joe Soap..

Colm: I really enjoy your posts. As well as a background in finance, you clearly have an interest studying companies you invest in; deep-diving financial accounts and attending board meetings. I think for such effort you deserve any profit you make. I think though, for the average punter that is not feasible.

Duke, your posts are great too, sure you had me at "lognormal model"  

In any case, speaking for myself, if/when I get near to retirement age, I think beating the market would be a bonus. I would expect rather, after costs, to not lose money and ideally to beat the rate of inflation. If I could get that with let's face it, zero effort, I would be happy.


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## Gordon Gekko (30 Jul 2021)

Hi Colm,

Quite a few providers submit their real world client portfolios to Asset Risk Consulting (ARC) who then categorise the portfolios based on volatility rather than what the adviser calls them. The portfolios are then benchmarked against the competition, all on an ‘after fees and charges’ basis. That seems to be the gold standard.

So Client A can say “my 3 month, 6 month, 12 months, 3 year, 5 year, and 10 year returns have been X, that’s in Y quartile for each period, and here’s how that compares on aggregate with the peer group.

Progress I’d say.

Gordon


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## Colm Fagan (30 Jul 2021)

Firefly said:


> you clearly have an interest studying companies you invest in;


Yes, that is true, but I don't expect others to share my interest.  By studying companies closely, I see how much value there is in shares, so I am comfortable to invest almost 100% in them despite their so-called volatility.  In general , I trust the market to get the relativities between different share prices right, so I should feel equally comfortable investing in a broad index.  Strange to say, though, I don't have enough courage for that!


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## Duke of Marmalade (30 Jul 2021)

Steven Barrett said:


> I do get people referring to what happened to Bank of Ireland and AIB, the "blue chip" stocks and I have to explain that they were never blue chip and were always actually higher risk, smaller companies that should have never been described as blue chip.


I'll take your word, Steven, that you are not talking with the benefit of hindsight.
But my whole confidence in the system is still reeling from the bank collapse, not that I personally lost money in it.
I worked in the AIB Group and had many colleagues in the financial services industry.  In the very early days of trouble brewing I remember an executive in another company remarking to me how wonderful it was that dividends in BoI were now higher than their deposit interest - imagine! money for jam.  A couple of years later there were no dividends and worse, the share value had collapsed.  Totally and utterly unforeseeable to me and those around me - maybe we were too close to the trees.
Then I remember an incident with my medical consultant.  Things were  getting hot at the time.  Anglo's price had fallen substantially but it had just issued its half year report.  My consultant, knowing my job and wary of his own pension, asked me what I thought of Anglo.  I did a politician's duck and dive "well there are certainly bad rumours but the half yearly audited report says everything is honky dory and the balance sheet is as healthy as ever".  Within a few short months Anglo was toast.
So unlike Colm, I do not have much confidence in financial statements,  their primary job seems to me to promote the company.


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## Gordon Gekko (30 Jul 2021)

I think that’s oversimplification.

What are most companies’ assets made-up of? Stock, debtors, etc.

Clearly, in some businesses, such as banking, there are things going on that can potentially blow you up. There are fund managers and investors who just avoid those sectors completely insofar as they can.


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## Steven Barrett (16 Aug 2021)

Duke of Marmalade said:


> I'll take your word, Steven, *that you are not talking with the benefit of hindsight.*
> But my whole confidence in the system is still reeling from the bank collapse, not that I personally lost money in it.
> I worked in the AIB Group and had many colleagues in the financial services industry.  In the very early days of trouble brewing I remember an executive in another company remarking to me how wonderful it was that dividends in BoI were now higher than their deposit interest - imagine! money for jam.  A couple of years later there were no dividends and worse, the share value had collapsed.  Totally and utterly unforeseeable to me and those around me - maybe we were too close to the trees.
> Then I remember an incident with my medical consultant.  Things were  getting hot at the time.  Anglo's price had fallen substantially but it had just issued its half year report.  My consultant, knowing my job and wary of his own pension, asked me what I thought of Anglo.  I did a politician's duck and dive "well there are certainly bad rumours but the half yearly audited report says everything is honky dory and the balance sheet is as healthy as ever".  Within a few short months Anglo was toast.
> So unlike Colm, I do not have much confidence in financial statements,  their primary job seems to me to promote the company.


100% hindsight Duke! I didn't know enough at that time and was more focused on giving the people what they wanted so I could reach my sales target than anything else. 

After the big crash, I met a guy who worked for National Irish who used to have €600,000 in NIB shares. At the time I met him, they were worth €60k. I asked him if at any point during the slide from €600,000 to €60,000, did he ever think of selling them? He said "not once". 

A lot of people lost a lot of money. There's nothing we can do about that but we have to learn from it and reduce the chances of such catastrophic, almost permanent losses occurring again. 


Steven
www.bluewaterfp.ie


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## Duke of Marmalade (16 Aug 2021)

Steven Barrett said:


> 100% hindsight Duke! I didn't know enough at that time and was more focused on giving the people what they wanted so I could reach my sales target than anything else.
> 
> After the big crash, I met a guy who worked for National Irish who used to have €600,000 in NIB shares. At the time I met him, they were worth €60k. I asked him if at any point during the slide from €600,000 to €60,000, did he ever think of selling them? He said "not once".
> 
> ...


I wasn't questioning your bona fides, Steven.  I looked up Investopedia and I suppose BoI and AIB should not have been described as "blue chip".
Nonetheless my recollection is that these shares were regarded by almost all as rock solid.  Typically dividend yields were much lower than what you would get on deposit with the same banks, so certain was the assumption that share prices would rise.
I heard tell of self employed folk having all their "pension savings" in bank shares as an alternative to property, folk that were afraid to take the risks of investing in "real" shares.
I suppose my point is that if I was a financial advisor I would be wary about playing down the relevance of the collapse in bank shares.


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## Steven Barrett (16 Aug 2021)

The collapse of Irish bank shares is something that still pains a lot of people so it is a good example to use when talking to clients, especially when comparing the size of Irish banks to today's blue chips such as Apple and Microsoft. I use it more to put people's mind at ease when they compare the size of the Irish banks v Mega cap companies.


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## Marc (16 Aug 2021)

I used this as the opening line for a dissertation on the subject

“_The purpose of the order before the House...is to give trustee status to the shares of Allied Irish Banks Limited....The main qualifications for trustee investments are that they should be secure and give a reasonable income to the beneficiary. *The shares of Allied Irish Banks* fulfil these criteria and they are a suitable security for inclusion in the list of authorised investments_.” Minister for Finance Charlie Haughey in the Seanad Éireann December 1969


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