A recent survey by Platforum revealed that there is a mixed understanding of the basic concept of value investing among advisers, with many confusing it with speculating on particular countries or capitalising on political changes that might affect markets.
The whitepaper said while some were able to define it clearly and accurately, many could not.
The performance differential between value and growth indices highlights the important distinction between the two styles. Over three years, the MSCI UK value index has delivered half the performance of its growth counterpart, returning 14.2% compared with 28.5%. Likewise, US growth stocks in the S&P 500 have also outperformed their value rivals over the same period.
Performance between value and growth indices for UK and US equities
Graham Bentley, managing director at Gbi2, argues it is unacceptable for advisers to not understand investment. “Would you allow an unqualified surgeon to operate on you or your family, let alone pay for it? Would advisers be happy if unqualified people were offering financial planning services? I suspect not,” he says.
Bentley says many adviser-managed portfolios are run using platform-provided asset allocation “boxes” populated by passive funds or actives plucked from a list based on past performance ratings.
“This is ‘painting by numbers’ investment management, requiring no expertise, performed as a justification for charging an ongoing ad valorem fee – often 1% and more – that is somewhat more profitable than a one-off fee for ad hoc financial planning.
“A client could go through the same automated, easy-to-follow process for themselves and save 1%. If you’re not qualified to offer your clients investment management, then don’t – either recruit staff who are qualified, or outsource it to professionals.”
Advisers shouldn’t run money
Portfolio Adviser spoke to a number of experts in the industry and the consensus view was that while financial planning and investment are two separate jobs, an adviser should have an understanding of the underlying dynamics driving investments.
Clive Waller, managing director at CWC Research, explains that when first began in the industry 90% of adviser firms were running money to a greater extent and now this is under 10%. He adds it is the tiny firms, those least qualified, that are still doing this.
“No big firm will risk their ability to continue trading by allowing advisers to be pretend asset managers,” he says.
Waller states matter of factly: “Advisers should not run money.”
“I read and hear things from advisers that indicate they shouldn’t carry more than a tenner in their wallet as they are clearly too incompetent to manage it. You only have to look at the blogs. Then I meet advisers whose knowledge of investment is awesome.
“Financial planning is complex enough on its own,” he adds. “There are one or two exceptions who are just stupidly intelligent and can do both. All advisers should have a single GP qualification that includes investment studies to quite a high level so that they can act as GPs – you can currently be a chartered/certified financial planner with very limited investment knowledge.
“However, you cannot outsource unless you have the knowledge yourself to conduct the due diligence.”
Out of favour
Some experts argue advisers have a mixed level of understanding of the two investment styles because value has been out of favour in recent years, and the economic climate generally more supportive of growth.
The Platforum whitepaper outlined that the difference between ‘growth’ and ‘value’ has become more blurred.
It said: “Value investing tends to be placed in clients’ ‘long-term investment’ bucket within their retirement portfolios. Many advisers feel that now is the time for value investing, with dividend growth and low beta expected to help protect portfolios against market falls.”
Mark Polson, founder of the Lang Cat, says: “I don’t believe that advisers don’t know the basics for a moment. But if you’re not picking the funds or the shares on a daily basis, you might fall out of practice on themes and styles.
“Again – if you believe in passive investment and simply use passive multi-asset funds, whether a particular manager has a growth or value bias is of exactly no interest to you.”
What are the basics?
Gavin Fielding, editorial director at Fundscape, says most advisers offer a financial planning service and outsource the investment advice to managed portfolios services in all their different forms.
He explains that while there are still generalist advisers that like to manage investments or at least pick funds, this type of adviser joined the industry because they were interested in this aspect and tend to have decent knowledge, experience and qualifications.
“What always concerns me about anybody operating in this way is that unless they are monitoring the markets 24/7 and have support to do so, then there is a risk they will miss a market event that requires some nimble intervention. They should know the basics, but what are the basics?”
Fielding adds that an adviser should be able to provide a competent explanation to a client asking things like what will happen to the portfolio in predictable scenarios, such as if interest rates go up or down, or if there is a stock market crisis. “They need to be able to articulate how it should behave. At the same time, if they are recommending funds and portfolios they need to understand metrics on the fund factsheets.
“If they are recommending them then they should understand what they do and how they behave, the construct of what lies beneath… you should never buy something (or recommend) you don’t understand.”
Polson agrees. He says advisers should know enough to “talk intelligently, intelligibly and honestly” with clients about the portfolios they already have, and how the adviser would put their money to work.
“Again, if it’s not the specialism of the firm, then that’s fine. I have never met an adviser who doesn’t know the basics.”