How much is financial advice worth?

Tangible Cost V Intangible Value
How much is peace of mind worth?

Treating Customers Fairly

The Financial Conduct Authority (FCA) has a policy that advisers must follow called Treating Customers Fairly (TCF). I actually find it worrying that something so basic even NEEDS a regulatory policy and its very own acronym. But apparently lots of advisers don’t treat their customers fairly. Surely, any reasonable adviser would want to treat their customers fairly; after all it is in the firm’s best interest to do so as satisfied clients will spread the word and refer the firm to friends while disgruntled customers won’t be long in telling everyone to stay away.

I really care about our clients and want to make sure that we treat them fairly at all times. I want to make sure that we deliver a service clients genuinely get value from.  In fact, I have often been described as “obsessive” about making sure we deliver true value on an ongoing basis.  As a result I regularly question what we do for our money and whether we really help clients enough to justify our fees. One of the things I do to obtain a sense of perspective during these times of self doubt is to take a quick look back through notes of phone calls and old emails from clients’ who sought advice on a new investment idea. This is a wonderful way to check what we said at the time and compare it to what actually happened with the benefit of hindsight.

The world is about to end; buy gold!

One example that crops up repeatedly, particularly in times of market stress, is “should I invest in gold” and even on occasions “should I switch everything to gold”. The question is often prompted by adverts for funds or services alongside media articles proclaiming the end of the world as we know it. These stories typically include comments from supposed experts saying things like “everybody knows that equities are dead and bonds are on a life support system that could be turned off at any time. The only sensible strategy is to buy gold”. With the benefit of hindsight it is interesting to note that these stories often appear around the time of peaks in gold prices (i.e. just about the worst time you could possibly pick to invest in the stuff!). They tend to include statement along the lines of “even at today’s prices there is still plenty of future growth there for the taking” to explain why this time is different and prices will continue to rise indefinitely.

Media and Marketing cause people to make poor decisions

In June 2011 some clients’ were asking me if they should switch cash and other investments into gold to protect them against the apparently imminent collapse of the stock market – at least according to sensationalist publications like Money Week. Companies like Bullion Vault were being promoted heavily at the time. As always, our advice was, “no just stick to the plan”; nobody knows what the future holds but a disciplined plan will give the highest probability of a successful investment experience over time. All of the clients at that time decided to stick with their agreed investment strategy and ignore the media and marketing department cries to jump into gold before it’s too late. Thank heavens for that!

Investing with the benefit of hindsight

Today I had a little look at the performance of gold over the last few years; it’s not a pretty sight. Since the third week in June 2011 (when clients’ were asking about investing in gold) the price has fallen in value by 18% while a simple balanced portfolio of 60% growth and 40% defensive assets has grown by 21%. So much for the press’ theory that the world was about to end.

In fact, since the peak of the gold price on 5th September 2011 the price has fallen by 34% compared to the return from a balanced portfolio of nearly 29%. Over the last 3 years gold has lost 19% while a balanced portfolio would have returned 21%. Over 5 years gold actually did make a profit of 39%. However, over the same period a simple buy and hold balanced portfolio (rebalanced once a year) would have returned 68%. In all cases the volatility (a useful indicator of risk) of gold was between 2 and 3 times that of a balanced portfolio. These figures are just examples; they take account of fund manager fees but not platform costs or Forty Two’s financial planning fees. By the same token, the gold figures don’t take any account of the cost of buying and selling, storing or insuring shiny little metallic bars.

Most gold investors don’t actually invest in gold anyway

It is also, worth remembering that very few people actually invest in gold. Most retail investors invest via a fund or ETF. They think they are investing in gold but are actually buying shares in gold mining companies. So how did they do? A lot worse! There are various different measures we could use to measure the returns from gold mining companies such as S&P GSCI Gold Total Return Index, Euromoney Global Gold Index or FTSE Gold Mines Index. All of these performed similarly so let’s just take the Euromoney Global Gold Index as an example over the same periods as above and compare;

Gold Returns
Balanced Portfolio V Gold Returns

It could have been different though

Of course there were other periods where the return on gold trounced a balanced portfolio but you would have needed a crystal ball to get in and out at the right time and, by the time the media are shouting about how great an investment opportunity (or protection strategy) it is, you would have almost certainly missed the boat. Although I have used gold in this article it could have been any number of other examples including the death of the Euro or a raft of individual company shares that were virtually guaranteed winners and too good an opportunity to miss.

It’s processes that matter

I don’t mean this article to come across as “I told you so” or “look how clever we are”. It could just as easily have worked out the other way round but a successful investment experience should not be dependent on guessing the right time to invest in (or pull out of) anything; it shouldn’t need super human forecasting abilities, a crystal ball or insider information.  A successful investment experience should not be dependent on speculation or luck just good or bad process. A picture paints a thousand words and this little graphic sums up the way to measure investment success relative to an investment process.

Quality of Process
Process Vs Outcome

Good Advice is priceless

The picture is clear (if not shiny). While a favourable outcome can never be totally guaranteed, simply by employing good process, we have managed to help clients overcome the natural temptation to give in to the constant bombardment of media commentary, advertising and even advice from friends and family. As a result we have helped them avoid making poor decisions based on poor process that could have cost them many thousands of pounds in losses. It is often difficult to stick to the long term strategy when all around you are suggesting you do otherwise. It is at times like these that a trusted partner to act as the voice of reason is worth its weight in gold (sorry I couldn’t resist the pun).



Source of Data: Financial Express Analytics, bid to bid, total return GBP at 25/06/2014. Balanced Portfolio assumed to rebalance in 1st January each year.

4 Responses to “How much is financial advice worth?”

  1. Olivia Johnstone

    The bank of Mum and Dad will officially close this Saturday when Amy gets married.
    Can you please throw away the key Alan? :-)

    • Alan Dick CFP

      Alan Dick CFP

      That’s great news (for you and Amy!). I hope she has a great day on Saturday.

      Consider the key not only thrown but melted down too.


  2. david

    I am going to be a Grandpa again… “The value of good advice” x

    • Alan Dick CFP

      Alan Dick CFP

      That’s awesome news. I know we provide great advice but I don’t think I can take credit for that one David.

      All the best



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