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Online DIY Investing VS Face to Face Independent Advice

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With a number of cheap DIY online investment solutions now available do you need to for financial advice or are you better off saving on fees and managing your own investments?

 

With stock markets in the US and UK close to all-time highs just five years on from the dark days of 2009 it is easy to become complacent and think that you can do it yourself, after all it would have been more difficult to lose money than make money over this time. The problem is that’s the past and as the well-known warning says past performance is not a guide to future performance.

 

DIY investors have a habit of picking last year’s best asset and are reluctant to buy something that has fallen in value. A professional advisor should be looking for next year’s best asset.

 

Some DIY investors find it difficult to move past simply looking at what grew most over the past year but when they do they often focus on a couple of other measures such as dividend yield or price to earnings ratio and buy investments that are above or below a trigger point. Without fully understanding why an investment has a particular yield or ratio using that as a buy or a sell signal can be very dangerous. For example a historic dividend yield can be very high because a company is about to go into liquidation and will never pay a dividend again!

 

Like a compulsive gambler DIY investors can be very good at recalling their wins but spectacularly bad at remembering their losses. They remember the technology unit trust they bought and trebled their money on and got out of just in time during the dotcom boom but forget what happened to their portfolio of supposedly “safe” bank shares during the credit crisis.

 

It is important to know your weaknesses as well as your strengths and like most IFAs we accept that advising on individual share, bond or property selection is not what we do. We leave that to specialist fund managers to handle this part of the process, typically through a unit trust or OEIC. In the investment process, through our research and expertise, we add value around the asset and regional allocation and then the individual fund selection.

 

Again, when it comes to investing money through collective investments DIY investors often pick a couple of last year’s best performers or if they know about a couple of performance measures such as Alpha or Information Ratio pick funds that score highest on this basis. These measures definitely have a place but without understanding why the funds have these scores using them in isolation can be dangerous. As we manage the money of hundreds of clients we have access to the fund management groups in ways that the ordinary retail investor does not. We are able to meet the actual fund managers in the flesh and ask them about the decisions they have made within their fund and why.

 

We also analyse how the funds blend with each other. A DIY investor picking the top two funds from the UK all companies sector may think they have diversification but in fact the funds could be invested in the same shares meaning they are actually adding to their risk. At the other extreme if you diversify too much you simply end up with an expensive tracker fund.

 

Investment selection and performance aside, financial advice is tailored to the individual and takes into account their needs. Advisers ask questions relating to your future plans and tailor your investments accordingly. For example, are you expecting to pay towards a wedding or university fees in the future? Will you need to have any major work done to your home? What would the impact be of a 20% fall in the value of your investment on your lifestyle? These are things an IFA considers when giving you advice and investing your money for you, we think of things that need to be taken into account that may seem irrelevant to the client until the adviser mentions it.

 

We also help protect investors from themselves! Inevitably there will be times when investments fall in vale. Some DIY investors have a habit of running for the hills at this stage and crystallising their losses. We’re able to remind them of the long term nature of their investments why they invested in the first place and encourage them to ride out the storm.

 

Tax planning is often overlooked by DIY investor as well. They know to use their ISA allowance each but very few actively make use of their CGT allowance to rebase the cost of their portfolio and save 18-28% tax on £10,000 + of gains each year.

 

Having your own IFA gives the client continuity, a point of contact who knows them and their individual circumstances eliminating the need for frustrating call centres or generic email responses.

 

There is also the opportunity for an IFA to spot flaws in other areas of your finances. As a result of examining other areas of peoples finances we have discovered several miss-sold policies (PPI anyone?) resulting in our clients receiving pay outs between £8,000 and £90,000!

 

Sometimes what the client is looking for is simply reconfirmation that what they think they need is correct and for the IFA to take the strain out of making the investment for them, the only part of form filling our clients have to do is in the signature box.

 

In recent years, when things have been tough our clients have benefited from the hand holding that we provide and the work we put into managing and monitoring their investments. Bryce Sanders, president of US financial services consultancy Perceptive Business Solutions words an IFAs role in tricky times brilliantly- ‘if a client is standing in the road and a speeding lorry is heading towards him, the adviser is the person who picks him up just in time and puts him back on the curb- that has value’.

 

In conclusion whilst we don’t dispute that there is a place in the market for DIY investing we do believe that it is a niche market and that if you have the knowledge, time to research, access to the correct technology, and confidence to invest via an online provider then that is probably the right option for you. However the majority of people do better by seeking out tailored advice from an independent financial adviser.

 

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