When I tell people I’m a financial adviser, the first question some people* ask me is: “Who do you get your research from?”.

*It’s always lawyers. But I guess they’re people, too…

I’ve never had a short answer that has satisfied me or the other person. I’ve tried to accommodate to their worldview, which embraces the role of “research” (in the FundSource sense) when providing financial advice.

But in my heart of hearts, my real answer is that by focusing on research you’re focusing on the wrong things.

This is my attempt to give a slightly more detailed response.

It’s easy to conflate financial advisers and investment managers

If this is your first question when talking to a financial adviser, I suspect you’re conflating the role of a financial adviser with the role of an investment manager.

Financial advisers and investment managers are different creatures. There is a small amount of overlap between them, but it is smaller than many people think.

A financial adviser should spend their time working with clients in order to:

  • help them to get clarity regarding their circumstances, needs, and objectives;
  • keep them accountable and help them to keep on track;
  • advise them regarding their insurance needs (to make sure they aren’t underinsured or overinsured);
  • identify areas where they might need to seek further professional advice (eg see a trust specialist or someone who can deal with relationship property matters).
  • educate clients – increase their literacy when it comes to investments, and understanding that whenever they make a financial decision it involves trade-offs and has long-term ramifications.

Part of the role of a financial adviser is to recommend investments, but it is only a part of the equation and in many ways it is secondary to all of the above.

By contrast, consider an investment manager working for an actively managed fund responsible for hundreds of millions of dollars of people’s money. This person will sit in front of a Bloomberg terminal most of the day. They spend their time considering the latest financial news. They have access to an enormous amount of information, including the best research available. Investment managers are typically highly intelligent and dedicated people. They are typically rewarded handsomely for high performance.

For an investment manager, research is a core part of what they do.

Unlike a financial adviser, the investment manager’s role isn’t to spend time with clients. Their job is to focus on the financial markets and try to achieve the best risk-adjusted return for the fund possible.

You can’t be half pregnant

To expect a person to do both roles well is absurd. It’s like expecting a person to be half-pregnant. Pitting an investment manager against a financial adviser is like pitting Roger Federer against your local tennis club’s champion player. As good as the local player is, they’ll struggle to take a game, let alone a set, off Federer.

There are plenty of “financial advisers” who think they can do both things, and market themselves as such. They often charge a lot in fees, wear very nice suits, and like to put the names of their companies on the side of buildings. But I think it’s better to keep the two roles separate and be good at one.

Consequently, I’m an advocate of managed funds, where my clients pool their funds with the funds of many other people, and these funds are managed by a reputable investment manager. I am not an investment manager or stock picker and do not make myself out to be.

Sure, there’s a cost involved with investing in managed funds. Part of this is paying for the specialised services of a focused, intelligent, dedicated team of investment managers. But it’s better to pay for specialists to do this. There are added benefits to pooling funds with others too, including getting the benefits of diversification, which is essential to a sound financial strategy.

When selecting my preferred managed funds, I consider all of the funds based on the information they legally have to provide, such as their Product Disclosure Statements. (I have had the privilege of helping funds prepare PDSs in the past, which has given me an insight into “how the sausage is made” and an ability to distinguish the important information from the rest.) Most other material is marketing and filler. In particular, focusing on historical returns is often counter-productive – there’s a lot of research indicating that high-performing funds typically “regress to the mean” and underperform in the following period.

Some of the key characteristics I look at are who the relevant parties are (for example, making sure the pooled funds are held separately from the investment manager by reputable organisations). I also look at the fees. There are many funds that rule themselves out because they charge too much – they’re wealth distribution schemes masquerading as managed investment schemes.

I also look at the investment strategy of the funds. With respect to investment strategy, I’m heavily influenced by the research of Burton Malkiel, author of A Random Walk Down Wall Street, and various other giants of the world of finance including Jack Bogle (founder of Vanguard), and Charles D Ellis (author of Winning the Loser’s Game).

I’ve developed the strong belief that prices of financial investments reflect known information – and to the extent the market isn’t “rational” and has corrections, this comes down to characteristics that aren’t known or predicted with any certainty.

This biases me towards recommending managed funds which are index-based with the lowest fees possible. Accordingly, the “research” that I’ve been asked about has, to my mind, little to no value.

It is also a distraction from the core role of a financial adviser, which is to work with clients to help them achieve their financial and lifestyle goals and manage their risks. An adviser needs to focus on clients, not products.

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Sonnie Bailey

Sonnie is an Authorised Financial Adviser (AFA) and former lawyer with experience in the financial services and trustee industries. Sonnie operates Fairhaven Wealth (www.fairhavenwealth.co.nz).