Tag: Independent

The Seven Roles of an Advisor

What is a financial advisor for? One view is that advisors have unique insights into market direction that give their clients an advantage. But of the many roles a professional advisor should play, soothsayer is not one of them.

The truth is that no-one knows what will happen next in investment markets. And if anyone really did have a working crystal ball, it is unlikely they would be plying their trade as an advisor, a broker, an analyst or a financial journalist.

Some folk may still think an advisor’s role is to deliver them market-beating returns year after year. Generally, those are the same people who believe good advice equates to making accurate forecasts.

But in reality, the value a professional advisor brings is not dependent on the state of markets. Indeed, their value can be even more evident when volatility, and emotions, are running high.

The best of this new breed play multiple and nuanced roles with their clients, beginning with the needs, risk appetites and circumstances of each individual and irrespective of what is going on in the world.

None of these roles involves making forecasts about markets or economies. Instead, the roles combine technical expertise with an understanding of how money issues intersect with the rest of people’s complex lives.

Indeed, there are at least seven hats an advisor can wear to help clients without ever once having to look into a crystal ball:

The expert: Now, more than ever, investors need advisors who can provide client-centred expertise in assessing the state of their finances and developing risk-aware strategies to help them meet their goals.

The independent voice: The global financial turmoil of recent years demonstrated the value of an independent and objective voice in a world full of product pushers and salespeople.

The listener: The emotions triggered by financial uncertainty are real. A good advisor will listen to clients’ fears, tease out the issues driving those feelings and provide practical long-term answers.

The teacher: Getting beyond the fear-and-flight phase often is just a matter of teaching investors about risk and return, diversification, the role of asset allocation and the virtue of discipline.

The architect: Once these lessons are understood, the advisor becomes an architect, building a long-term wealth management strategy that matches each person’s risk appetites and lifetime goals.

The coach: Even when the strategy is in place, doubts and fears inevitably will arise. The advisor at this point becomes a coach, reinforcing first principles and keeping the client on track.

The guardian: Beyond these experiences is a long-term role for the advisor as a kind of lighthouse keeper, scanning the horizon for issues that may affect the client and keeping them informed.
These are just seven valuable roles an advisor can play in understanding and responding to clients’ whole-of-life needs that are a world away from the old notions of selling product off the shelf or making forecasts.

For instance, a person may first seek out an advisor purely because of their role as an expert. But once those credentials are established, the main value of the advisor in the client’s eyes may be as an independent voice.

Knowing the advisor is independent—and not plugging product—can lead the client to trust the advisor as a listener or a sounding board, as someone to whom they can share their greatest hopes and fears.

From this point, the listener can become the teacher, the architect, the coach and ultimately the guardian. Just as people’s needs and circumstances change over time, so the nature of the advice service evolves.

These are all valuable roles in their own right and none is dependent on forces outside the control of the advisor or client, such as the state of the investment markets or the point of the economic cycle.

However you characterise these various roles, good financial advice ultimately is defined by the patient building of a long-term relationship founded on the values of trust and independence and knowledge of each individual.

Now, how can you put a price on that?

Who would predict the price of oil?

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.

Confusion on Sources of Financial Advice

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:

What 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.