The price of crude oil has fallen around 40 per cent since a recent peak in June this year. This has a profound effect on economies and markets around the world as the cost of manufacturing and transporting goods falls along with oil producers’ income and the currencies of oil-rich countries.
The theory goes that consumer spending will rise because people have more disposable income; that inflation will fall as the price of goods eases; and that companies with high energy bills will become more profitable. If lower prices hold, the effect might become political and environmental as the balance of world power shifts from oil exporters to oil importers, and the impetus to develop cheaper clean energy wanes. Oil seeps so deep into the global economy you might think that to be a successful investor you need to have an accurate view on its price and its impact on asset prices. But you would be wrong.
No-one with an opinion about oil knows whether their view is right or wrong, and only the changing price will confirm which they are. Market prices are a fair reflection of the balance of opinion because they are created by many buyers and sellers agreeing on individual transactions. As an investor you can take a view of whether that balance – that price – is right but, like all other people with an opinion, you have no way of knowing whether you are right or wrong until the price moves.
Knowing this, it seems irrational to take a view (or a risk) on something so random as the direction of the oil price. In fact, why would one take a view on anything related to the changing price of oil; the US economy, for example; or the price of Shell; or Deutsche Post; or anything else?
The rational approach is to let capital markets run their course and to have a sufficiently diversified portfolio that allows you to relax in the knowledge that, over time, you will benefit from the wealth-generating power of your investments as a whole; without risking your wealth on a prediction that might go one way or the other.
There are essentially two main sources of financial advice in the UK; Independent Financial Advisers and Tied Agents. The key difference between the two is that Independent Financial Advisers are required to act as the agent of the client and to select products from the whole of the market, whereas Tied Agents represent a single financial institution, or at best a limited number of companies. Independent Financial Advisers are also required to offer the option of being paid by a fee instead of taking commission when they arrange transactions on your behalf.
So, what does this matter? After all, both types of adviser put themselves forward as providing comprehensive financial planning, wealth management, tax and estate planning. Some Tied Agents even promote their fund management service as offering a ‘Best of Breed’ – take a look at this Google Search result page for a few examples.
Well, the chances are that you already own products from a variety of companies. Once the financial planning advice has been provided you are probably going to need to acquire some products in order to provide the security that you require and deliver your long term financial goals. With a Tied Agent you immediately encounter a couple of problems. They are not allowed to advise you on the products which you hold with other companies. Just as importantly, when it comes to putting the financial plan into action what choice do you get from a Tied Agent? If you have been following this so far, it will come as no surprise to learn that what you get are products from the companies that they represent.
Suppose you have gone ahead and bought a number of products from a Tied Agent and after a while you decide that their investment performance has not been up to scratch. You go to the Tied Agent and ask him what your options are. He can only offer other fund choices from the provider that he represents.
Independent Financial Advisers, in contrast, can advise on all products that you already hold. If you need to buy new products, they are required to search the whole of the market and recommend the most suitable one for your needs. They are strictly answerable to you and act as your agent and not that of a product provider.
Clearly it is a matter of personal choice. The following table may help you to decide which type of advice is best for you:
If you do decide that Independent Financial Advice is best for you make sure that you check that is in fact what you are getting. Due to the obvious advantages Independence confers on consumers Tied Agents working for ‘Wealth Management’ companies will go to considerable lengths to fudge the issue. Ask them out right whether they are an Independent Financial Adviser. If in doubt check the Unbiased Register to see if their details are included.