The Money Managers | In the News

Many people coming to terms with the current investment market conditions are reticent to pay for advice and question the value they will recieve. The real question is, “what is the cost of bad advice”? It is at times like these that good advice and strategy pays for itself many times over and the consequences of poor advice becomes most evident. My colleague, David Haintz calls good advice a “stupidity prevention program”.

We don’t have to go far to see the disastrous position people have found themselves in with highly concentrated portfolios in the wrong sector. Poor advice and inappropriate gearing in the case of Storm Financial Services has led people to ruin. Storm was an advisory group which put clients into highly-leveraged equity investments irrespective of their age, existing assets or risk appetites. The collapse of Westpoint Securities is another case of bad advice.

Overseas, Bernie Madoff, who swindled investors out of $US 50 Billion and other fraudulent purveyors of so called advice have robbed people of their entire life savings. In Japan, a flamboyant businessman named Kazutsugi Nami was arrested recently and charged with defrauding investors of $US2 billion in a scam that involved him making promises of a 36 per cent annual return.

While each of these episodes is unique, they share a common characteristic in that people were lulled into investing into something that should have seemed too good to be true. People focus exclusively on return, rather than the risk which drives return. This provides an opportunity for purveyors of bad advice or plain scam artists to ply their wares.

So it's worth reflecting at this time on exactly what constitutes good advice and how investors can recognise it when it is offered to them.

Good financial advice is not about providing a forecast. The smartest advisers are not those who seek to predict what will happen next in the markets, but they are the ones who help their clients make smart decisions about their money to secure the capital market rate of return over time. This kind of advice is not based on predictions or guesswork, but on financial principles backed by long observation, research and the needs of investors.

Advice is about structuring an investment strategy that is right for the individual, not one that reflects what the advisor is trying to sell or what will earn them the most fees or commissions. It has to match each person's appetite for risk, while helping them reach their specific investment goals.

It is about ensuring clients' portfolios are structured around risks where there is an actual relationship with return. The scandals mentioned above largely resulted from people not understanding or not being told the sizeable risks they were taking in chasing returns.

Good financial advice means ensuring you understand what you are investing in and that the management of those assets is handled transparently and with a great deal of integrity. Advisors need to be upfront with you about what they can and can't control. If you want to enjoy long-term equity returns, you need to be exposed to the equity market. That means you can't avoid being exposed to a market downturn. However, you can ameliorate controllable risks such as fees, taxes and the degree of diversification.

Good advice means keeping you disciplined in your chosen asset allocation even when things seem hopeless. Good advisors remind you that falling prey to short-term anxiety and dumping your asset allocation to hide in cash may not best serve your long-term wealth aspirations. It leaves you at risk of missing the bounce in asset prices when it comes but it also exposes you to a very real possibility that inflation could decimate you when the eventual recovery kicks in after so many stimuli.

Potential returns are at extraordinarily high levels after a market collapse. If you keep your nerve, you can be positioned for the recovery when it does eventually come. Investors who did not seek advice from competent financial planners are more likely to have sold their equity investments during the crisis than investors who are properly advised.

Poorly advised investors are less likely to have a formal, written, long-term financial plan. They are more likely to crystalise losses and make reactive, emotional choices rather than decisions that suit their long-term needs. They ignore the basics of a balanced, long-term portfolio. In contrast, well advised investors have made long-term plans and are likely to be sticking to them. Good advice is worth paying for, now more than ever.

In the News

Sound Advice Can Temper Great Expectations

Latest News

Downloads