Bungee jumping is a terrifying experience.
It requires you to risk your life (literally) on the strength of a piece of rubberised string.
Now the statistics are very clear: Bungee jumping is safe.
But, when you tip toe to the edge of Bloukrans bridge, look over into the abyss and push off into blue sky with nothing but an elastic around your ankles… well you get the picture.
Financial advice is very similar. You're often putting your entire accumulated wealth in someone else's hands. They are the piece of string that anchors you to your current reality.
If your advisor messes up, well splat you go at the bottom of the gorge. Retirement ruined; the fruits of your life's harvest squandered.
So, I'm sure you'll agree, selecting the correct advisor to work with is one of the most important decisions you're going to make in life.
Unfortunately, because the world of finance is complex, financial advisors come with very different skill sets.
Perhaps think about the world of finance like the world of medicine.
You have GP's, heart surgeons, orthodontists, oncologists, urologists, podiatrists and anaesthesiologists.
Each specialisation delivering very different levels of expertise and service.
Finance is no different.
Today I'm going to explore the different types of financial professionals available to you, and what you can expect them to provide in terms of service and advice.
Let's discuss each in turn.
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Professional #1: The Stockbroker or Private Client Trader
These guys are the fun guys.
You might also have heard them referred to as “dealers”.
And, they’re not your typical financial advisor. They’re the guys watching markets constantly, looking for every opportunity. And, while they want to make you money more than anything else, they’re in the business of support.
They don’t advise on asset class allocation or your personal risk profile, and they certainly aren’t going to take into account your personal history and background.
Their focus is squarely on a specific market. It’s their job to understand the moving parts of a market, how different products are constructed and how to physically access the correct financial products, in best way, for their clients.
They generally provide what is called an intermediary service.
What can you expect from Private Client Trader?
If you’re not comfortable with a trading platform, these guys will assist you with inputting and monitoring trades.
The reason they’re manning the phones is because a lot of their day they’re taking clients through the mechanics of the financial instruments and how and where to execute them.
They’re generally experts in the various contracts and investment products. Speak to a Private Client Trader if you need to understand how to express a specific investment view.
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They’ll give you quick answers to immediate problems. They’re also totally on top of the day-to-day market movements. If you’re looking for answers as to why a company’s stock is moving, these guys will know what the results looked like that morning and how the market is reacting.
A good Private Client Trader doesn’t analyse whether you should or shouldn’t be buying a specific investment product, it’s his job to get you to market in the most efficient way possible.
He’ll help you to understand exactly what you’re buying. Whether it’s explaining the balance sheet of a company, the constituents of an ETF or potentially what the gearing and counterparty of an option, a CFD or a complex off market structure.
They’re there to get you low cost, excellent support and the information you didn’t even know you required.
Who should work with a Private Client Trader?
They’re best suited to very experienced investors looking at specific targeted investment products or active traders who require a level of detail not usually required by the average investor.
You will be expected to make the buy and sell decisions, but you’re using your stockbroker as a sounding board on the idea as well as the best way to execute it.
In medical terms: These are the guys who understand how the MRI machine works and how to use it.
Profession #2: The Portfolio Manager
A portfolio manager generally provides what is considered discretionary service.
This means he will be taking control of a “portfolio” of investment instruments. Like a Private Client Trader this doesn’t mean the Portfolio Manager is taking into account your personal risk profile. It’s the job of a Portfolio Manager to handle your account in terms of an agreed upon mandate. They’re sourcing and investing in different financial markets at their own discretion but are constrained by the rules that you choose to give them.
If for example you tell your portfolio manager you would like a 100% equity strategy that invests in large-cap US companies, it’s his job to find investment options in this universe and execute them.
You should hold him accountable for his performance.
Generally, a portfolio manager will also manage your account against and agreed upon benchmark.
Who should work with a Portfolio Manager?
Portfolio Managers are better suited to investors rather than traders. They don’t take complete control of your wealth, but you would look at allocating a specific portion of your investment to a portfolio manager to achieve your overall investment goal.
Here you should be comfortable understanding the level of risk you’re targeting, and while you’re taking responsibility for your overall asset allocation, the Portfolio Manager is taking responsibility for managing effectively within the universe you supply to him.
In medical terms: These are the specialists. The surgeons, the oncologists, the podiatrists.
Professional #3: The Wealth Manager of Independent Investment Advisors
Finally, we get to the most recognisable kind of investment advisor: The Wealth Manager. You might also have heard them called an IFA or Independent Investment Advisor.
These guys have perhaps the most difficult job of all. It is their responsibility to understand exactly what you’re looking for, but more than that, what you need out of your investments.
The first questions they’ll ask you will be around your income requirements and your overall level of savings.
They’re there to assist you in creating your own financial plan. And by using an investment advisor you’re usually humble enough to admit that you probably don’t know what is best for you when it comes to allocating your funds.
They will start by creating a risk profile, and then use various portfolio managers, asset managers and funds to build up the correct type of investment strategy.
They’re also going to look at your “structuring”. They’ll make sure you’re not just getting the best returns but that you’re generating returns in a way that’s efficient when it comes to tax. They’ll also concern themselves about how you are one day planning to draw down on your investments in retirement or when you need access to lump sums like school fees etc.
In medical terms: These guys are your GP. They do the general check up on your financial health and then shift you to the correct expert depending on the severity of your ailment. Occasionally they might just tell you to take two Panado’s and call them in the morning.
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So, should you be using a financial professional in this day and age?
As an investment professional myself, you’re going to have to take this conclusion with a pinch of salt of course. As they say, don’t ask a barber if you need a haircut.
But, in my experience, having worked as all three types of these roles at some point in my career, I can say without doubt that clients who work with advisors do significantly better than clients that opt to go it alone.
I’ve seen the Do-It-Yourself investors dump 40% worth of performance just to avoid a 1% fee all thanks to easily avoidable asset allocation decisions.
At the same time having worked in the markets for as long as I have, for me, the idea of paying another person to assist me with something as simple as an asset allocation is cringe worthy.
I would say: The only person that can know for sure is you. Take an honest look at how you have managed your money up until this point. If you feel you’ve done a great job, and have tracked, measured and have a high degree of confidence that you’ve outperformed in your targeted environment. Then keep doing what you’re doing!
If, on the other hand, you’ve experience sub-standard returns, endless issues and performance that isn’t up to scratch, well it should be obvious, use a professional.
If you’d like to find out more about the various types of relationships you can set up with my firm Rand Swiss, feel free to contact us on firstname.lastname@example.org
Analyst, The South African Investor