Not about Index vs Active Funds any more!

On the back of increasing index fund sales in the Sunday Times on 18 October 2015 Ian Cowie talked about there being a “power struggle” between those promoting index funds and those that believe active funds are better.

In my view this is a distraction away from a more fundamental question that needs answering – “Do adviser’s that promote investment management as their USP (i.e. choosing the best shares or funds in advance and timing the markets) add value?”

Based on my initial research comparing the performance of a static asset allocation fund (market cap weighted with a home bias using very low cost index funds) with the after charges performance of an index of leading discretionary investment managers the answer to this question is a resounding NO over the longer term.

The comparison I made was on a risk adjusted basis, back tested over 5, 7, 8 and 10 years and points to the static asset allocation funds not only beating the comparable discretionary investment management index but being in the top 25%! Armed with this information, the question that should be asked of discretionary investment managers is “What am I paying for?”

My message is not that advisers are a waste of money but, that clients when choosing one, should look behind the veneer/conventional wisdom (often promoted by the money media) for the things that advisers do which really makes a big difference to clients meeting their goals and having a successful investment experience namely:

  • Creating a financial plan which supports a clients short, medium and long term goals i.e. the horse (financial plan) comes before the cart (investing) every time
  • Helping clients keep on track e.g. investment success is about sticking to the financial plan and adopting simple investment planning principles
  • Simple investment planning principles including:
    • choosing the right asset classes consistent with a clients risk tolerance and financial planning goals
    • explaining and managing the risks of the chosen investment strategy
    • choosing the right funds that closely match the asset classes and keep fund costs to an absolute minimum
    • rebalancing to maintain the risk of the chosen investment strategy but only when the benefits of doing so out way the costs
  • Helping clients minimise tax and reducing platform costs which increase the returns a client will receive
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