Adviser Mood swings Need an Explanation

Every so often a blog from Kevin references his experiences during the week, and this week I’m going to join in too.  I’ve been planning our next event which is looking at tax year end pension and investment planning, looking at the impact of the pension reforms on activity which must take place before 5 April 2015, and exploring other investment opportunities, including VCT, EIS, SEIS, BPR and AIM investing. 

Independent advisers should consider all suitable solutions for their clients, and independent advisers working closely with accountants are likely to have a particular awareness of tax planning solutions to improve their mutual clients’ after-tax returns from investing in property or selling business property. 

Some of you are more engaged in this market than others, which is absolutely fine as we well know that the tax tail should not wag the investment dog, and clients are not always happy with the potential risks of these more esoteric investments, even if they are offset by tax relief to a huge extent.  And now the FCA is engaged in its latest thematic review of adviser due diligence which ought to focus our minds on what good practice looks like.  One thing we do know is that the FCA likes consistency in the advice process.  So, here’s an example. 

You think that investing in AIM shares is a really bad idea because the AIM index has dramatically underperformed.  The top 10 or 20 shares by market capitalisation have performed badly and no investor should want to tie their fortunes to the share prices of a measure so heavily reliant on these poorly performing companies.  So the consequence is that investors should look for specific companies, themes, sectors and opportunities that are likely to outperform their competitors, or which are likely to display higher returns or lower risk than other similar companies.

Here’s the thing : this sounds exactly like the active v. passive debate.  Stock-pickers wonder why you would tie your investment fortunes to indices chock full of the biggest but potentially the most sluggish companies.  Passive investors suggest that no-one can predict with accuracy which are the companies to follow until it’s too late and the gains have been made.  Smart beta supporters argue that their value or small company tilts, or other screening criteria, lead to companies heading for the highest growth potential. 

I’m not saying that any or all of these answers are right or wrong, some of the time or all of the time.  But please : know why you think what you think.  And if in one part of your proposition you think that passive index investing is best, be prepared to explain why, especially if you think that active stock-picking is best in different circumstances.

[p.s. the relative efficiency of different markets might be a good reason why you take a different approach between main markets and other investments]

Gill Cardy, 10/10/2014