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

[Marc]

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

 

[Colm Fagan]

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.

 

[GSheehy]

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

 

[Colm Fagan]

@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.

 

[Duke of Marmalade]

@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.?

 

[Firefly]

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.

 

[Gordon Gekko]

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

 

[Colm Fagan]

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!

 

[Duke of Marmalade]

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.

 

[Gordon Gekko]

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.

 

[Steven Barrett]

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
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[Duke of Marmalade]

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
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

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.

 

[Steven Barrett]

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.

 

[Marc]

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