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What do you get when you combine Financial Planners with DIY investors? I know, it sounds like the opening line of a joke, but I’ve been thinking about this a lot lately…
Is it possible for Financial Planners to work with DIY Investors?
When it comes to working with DIY Investors, it’s easy to just say no and be done with it…but I believe a working relationship is achievable.
Of course, it may be that you actively choose not to work with anyone who looks or sounds like a DIYer. That’s completely understandable. We all know that the fun work in financial planning is doing the complete job for people where the investment piece (although important) isn’t the main driver. However, I can think of a few reasons why you might decide to embrace the DIY investors that come your way from time to time:
You need the income and your cash flow is not yet mature enough to say no. No shame in that.
There will always be some really hard core DIY investors who won’t be right for you, but many so-called DIYers are swayable if they can get past a few sticky issues.
Some of the DIY investors that you do secure will happily morph into more complete financial planning clients over time, once they gain comfort and trust in your investment process.
A recent New Model Adviser article focussed on some research conducted by Pershing. Their survey suggested that 49% of higher net worth investors considered themselves self-directed. Let’s assume that 10% or 20% are committed to doing it themselves. That’s still 3 or 4 out of 5 DIY prospects that have the potential to work with you, if you have the right proposition.
As a first step to understanding them, I think it’s important to realise that while they present to you as wanting to do it themselves, this is more likely just a reflection of some healthy cynicism regarding advisers and their ability to add value on the investment piece. If we are brutally honest, who can blame them?
Most financial advisers I know don’t get another financial adviser to manage their affairs for them. Why do you think that is? Clearly they can’t see the value when compared with the costs.
The first issue to consider is:
What are DIY investors looking for in a proposition?
One issue highlighted in the Pershing research was (unsurprisingly) fees. In a financial planning relationship, asset based fees can work just fine, because the value added is so high. However in an investment-only relationship the value added is less and costs matter a whole lot more. So the first thing to look at is how you’re going to price an investment-only service aimed at DIYers. Many prospective clients in this space are looking for fixed fees rather than asset based fees. You can certainly price this up and still make a profit using a fixed fee approach.
Other things DIY clients say they are looking for (according to Pershing) include “good quality flows of news and information and systems that allow them to access market information and good quality reporting.”
The type of information you sift and collate through in your own work as an adviser and through your investment committee is the type of information these clients want, so you could certainly package or repackage some of that as outward communication for this investment-focused client segment.
The challenges
As I said at the outset, you may just decide this segment is not for you. However, if you make a decision to try and engage with the DIY investor, then there are some pitfalls to watch out for.
The most obvious and problematic, is that while many clients claim to only be interested in investment (or pensions, or whatever); when you get under their skin with some good questioning, this is not the case. This leads me to believe that a certain percentage of so-called self-directed investors are not really that at all. However, your existing first meeting process should be able to sort these people out and pitch them your normal financial planning offering at the end of the first meeting, if that seems appropriate.
Of the rest who truly are seeking investment-only advice, there is the problem of service creep. Service creep occurs when the client has been secured on your investment-only service (at a much lower ongoing fee), but then realises they need advice in other areas like tax, family, care or pension issues. Saying no to these extra services, or charging for them appropriately can become very difficult and most firms are not geared up to do it at all, so don’t deceive yourself. If you are going to work in this space, get your boundaries very clear in your own mind and in your written service proposition right up-front. Then you can charge for the extras, or at some point have a discussion about moving across to your full Financial Planning service.
You need a way to identify when a prospective client is a genuine DIY investor and have an education/sales process that deals with their issues and concerns. The investment questions you ask will be critical in helping these investors (and you, their adviser) gain clarity around what they do and don’t know.
If you want to work with some potential clients that think of themselves as DIYers, then good for you. Clearly there will need to be some ‘think work’ done at your end to ensure you have a proposition, pricing and very clear boundaries around what will be provided.
If you can get that right then some profitable work awaits.
Case Study
Ruth Sturkey – The Red House (TRH)
The Red House are a full service Financial Planning business.
Here’s how Ruth explains what they do for clients, taken (with Ruth’s permission) from a recent newsletter she sent to her client base:
Structure: The first and critical step is getting the portfolio structure which is right for you. This must be based on your emotional and financial tolerance for, and need to take, risk. It involves selecting sensible risks to accept and using high quality, low cost funds designed to capture the rewards that markets can deliver.
Governance: Making sure that your portfolio strategy and the funds that you own continue to deliver you with the greatest chance of a successful outcome. Just as importantly, but perhaps less obvious, is our role in preventing you investing in fad or too-good-to-be-true products. Much of this is behind the scenes work carried out on an ongoing basis by our Investment Committee.
Hand-holding: The hardest part of investing is having the confidence and emotional fortitude to stick with the programme through thick and thin. When markets are going up or down with great magnitude, as they inevitably do from time to time, investor’s emotions are prone to kick in either in the form of greed or fear often resulting in the destruction of wealth through a ‘buy high, sell low’ strategy. TRH’s wise counsel and ‘Three Pots Money Management Service’ prevent our clients from having to take radical wealth destroying actions.
Rebalancing: Over time portfolio structures drift due to market movements resulting in either too much risk (because equities have increased as part of the portfolio) or too little risk (equities have reduced because markets have fallen). Rebalancing seeks to ensure that the risk level of the portfolio remains where it was specifically designed to be. Whilst at times rebalancing can feel counter intuitive it is our role to unemotionally recommend you rebalance when the time is right to do so.
The ‘stuff’: Our job is also to take care of the menial, often boring, yet highly valuable administrative functions such as nudging you to make sure that your NISA and pension contributions are used and that capital gains are taken in a controlled manner avoiding as little time out of the market as possible. We all hate paperwork, so our aim is to take care of it for you!
The impact of poor decisions
The impact of such behaviour is truly damaging. Research by Morningstar, reveals that the average difference on an annual basis between the returns of a fund and those that the average investor receives is -2.5% a year to the detriment of investors due to poor buying and selling decisions. Even after taking into account TRH’s ongoing planning fees (which in addition to investment management and coaching also includes a comprehensive financial planning service and the all important Annual Planning Meeting (APM) to make sure you remain on track) it is easy to see the value of employing a steady hand to guide you through choppy waters.
Structure, process, discipline
TRH is there to provide perspective, stop you from owning investments that should be avoided, help you to keep faith in the programme and make you rebalance, just when you don’t want to! As I’ve said before, ‘structure, process, discipline’…it isn’t sexy but it works.