Over the past year, many parents, myself included, have seen Ofsted downgrade their child’s school from ‘outstanding’ to ‘good’. Indeed, Ofsted has actively chosen to make it harder for schools to achieve top marks.
Raising the performance bar should also apply to your investments, especially if you are one of the 2.4 million people in the UK who pay for wealth management.
A “wealthy” person with the £250,000 to £1m or more needed to justify hiring a wealth manager typically pays 0.25-1% of their investments each year in fees, with some companies charging up to at 2-2.5 percent.
For thousands of pounds ad valorem every year I would expect to be exceptional, not just good, and certainly not ‘needs improvement’ or ‘insufficient’.
You should also demand exceptional investment performance even if you have less than the minimum required for a wealth manager and instead go to an independent financial adviser (IFA) with a portfolio of £50,000-£100,000. Many IFAs don’t actually make fund selections or asset management decisions – they “outsource” this to the portfolio management services of the same wealth managers, working directly for wealthier clients.
Discretionary fund managers (DFM) present themselves as the crème de la crème of portfolio management: they charge high fees for their bespoke services, tailored to your personal situation, goals and risk appetite.
But a lack of transparency prevails, making it nearly impossible for customers to judge whether they’re getting value for money.
Let’s say your wealth manager just reported that your portfolio lost value in 2022, a likely scenario. With retail price inflation at 12.6%, amplifying the loss in purchasing power, this is bad news.
Your advisor is about to ‘hold your hand’ – reminding you that investing is a long-term business and that stock markets can experience difficulties along the way, that it’s just a loss of paper and that over the past five years your investment performance has been in the green. rather than red.
But beware. You only have one life and one chance to invest. If you wait too long to assess performance yourself, it will be too late.
You might also rightly fear that compounding fees, over time, will shift wealth from your pocket into theirs.
It is essential to “Ofsted” investment performance at least once a year, preferably spending as much time as a car purchase – which typically takes nine hours.
The first step is peer review. How does your DFM compare to the competition?
You would think that DFMs would be thrilled to have their clients review their performance. Unfortunately, most still only share data anonymously.
For years, we only had private investor indices from the Personal Investment Management and Financial Advice Association (PIMFA), the trade association with 1,000 member companies.
Its MSCI PIMFA Private Investor Index series displays the returns of five multi-asset class strategies, determined by a committee. There is also a new series of MSCI PIMFA Equity Risk indices.
You can access it on line to assess the performance of your investment portfolio and as a basis for discussing the asset allocation and structure of your portfolio.
These are useful comparators, but more transparency is needed.
A few organizations monitor DFM performance for IFAs, but do not yet provide direct access to the end consumer. Enter Asset Risk Consultants (ARC) which collects actual performance of over 350,000 investment portfolios from over 140 investment managers who are responsible for approximately £1.5 billion of assets under management.
It aggregates this data into a series of hints that you can use for free at suggestus.com. And for £25 you can buy a report that tells you whether your performance was good, bad or indifferent against a peer group.
Although the ARC names the participating managers, it does not publish league tables or publish the performance of individual managers. Also, it cannot tell you the exact asset allocation because indices are risk-based.
However, it is currently one of the few companies offering insight into the real returns generated by wealth managers.
The latest issue of ARC Wealth Index data, released this week, found that the average return for the most common risk profile was down 1.6% from the third quarter of 2022. This ARC Stable Growth Index Sterling has around two-thirds of its exposure in equities and the rest in other assets such as bonds. In the first nine months of 2022, it has fallen by around a third in real terms.
So far, we’ve looked at how wealth managers want, or at least suffer, you to rate them. But I would also compare their performance to what you would do yourself. This will likely involve a combination of cash and DIY investments.
From January 1 to September 20, 2022, cash returned less than 1% (0.9%, as measured by the ICE Libor 1 Month GBP Index, or 0.6% of the Royal London Short-term Money Market Fund) . Or consider the best one-year fixed savings bond interest rate at the start of the year compared to today – 1.41% vs. 4.6%, according to Moneyfacts.co.uk.
If you’re more of a wheelchair investor, most of your money would be invested in something you could easily select – probably a large global tracking fund.
Within this category, DIY investor platforms report that the £35 billion Vanguard Lifestrategy Fund range of funds is still popular. Among these, the 60% Equity fund fell 13% in the first three quarters of 2022.
You can also compare with how 400,000+ DIY Investors performed on the Interactive Investor platform – its Private Investor Performance Index showed that its average customer declined by -12.95% in the first nine months of 2022.
So there you have it, a handful of decent, if not perfect, comparators for your “Ofsted” investment.
If you’re still happy, there’s no harm in letting your manager know about this due diligence — it’ll keep them on their toes. If not, don’t sit on the information, act. Speak up and ask why your investment performance is poor.
Other difficult questions include: Who is your ideal customer? How many new clients do you welcome each year? What is your latest investment philosophy?
After wiggling them a bit, follow your instincts. “Good” can be enough if you trust them to do the best job possible.
If you think your manager “needs improvement” or is “insufficient”, ask to leave. But watch out for the fees.
Although the Financial Conduct Authority has not yet banned exit fees, you can mention the regulator’s new consumer bond requirements that exit fees must be of reasonable and fair value. I would say a “lobster trap service”, where you were lured only to find yourself trapped for several years by a system of sliding scale exit fees – 6% the first year, 5% the second and so on, is unreasonable .
A good manager will be so sure of his offer that he will allow you to leave whenever you want, free of charge. If they don’t, that’s a good reason for a bad grade.