Short, sweet and simple, they'll send an IFA packing.
According to global management consultancy A.T. Kearney, increasing numbers of high earners are choosing not to use independent financial advisers (IFAs).
Since the financial crisis began in 2008, the consultancy believes there has been a 50% drop in the number of people with a salary of over £100,000 opting for IFAs as a source of investment advice.
Instead, says A.T. Kearney consultant Neil Dennington, they're by-passing the middle man, and going direct.
"Rather than seeking out financial advice to protect and grow their wealth, people are tending to make much greater use of direct channels to manage and monitor their savings and portfolios," he says.
Dubious agenda
Here at The Motley Fool, we're no stranger to the urge to take control of your own investments, of course. Spend any time on our popular investing discussion boards, and you'll see posters debating the merits of any number of shares, bonds and funds.
More to the point, we all too often see the results of IFA-derived advice: investors locked into poorly performing funds with high charges, while the IFA banks a nice fat commission and books his next exotic foreign holiday.
And it's not just us. As the FSA's Retail Distribution Review confirms, there's deep disquiet about the extent to which IFAs point their clients at investments that happen to reward the advisor just as much as -- if not more than -- the client.
Note, we're not tarring all IFAs with the same brush. Fee-based IFAs have less of an incentive to offer high-commission products. But with commission-based IFAs, it can be difficult to dispel doubts over whose self-interest is being protected.
3 awkward questions
The trouble is, if you're stuck with an IFA, it's hard to shake the fellow off. Like double-glazing or timeshare salesmen, they don't seem to understand the meaning of the word 'no'.
Worse, they're all too ready to lapse into IFA-speak, bamboozling punters -- sorry, "clients" -- with obscure jargon and complicated sales pitches.
Believe me, I've seen it done. But I've also seen the effect of a few judiciously posed questions -- questions that go straight to the heart of the proposition that they offer.
So the next time your IFA pitches the usual range of impressive-sounding funds at you, sweep the list to one side and ask the questions below.
1. Where are the trackers?
Time and again, research shows that -- when costs are taken into account -- passive management outperforms active management.
As Tim Hale observes in Smarter Investing, for instance, over the period 1984 to 2002, the average American equity fund soared from $100 to $500 in terms of comparative spending power. But individual investors investing in those same funds saw their $100 turned into just $90 -- and that was during one of the biggest bull markets in recent history.
The best way to capture that market movement? An index tracker. But low-cost trackers don't pay IFAs much commission. And the lowest-cost trackers on the market don't pay the IFA any commission.
The moral? If your IFA doesn't recommend trackers for at least a chunk of your portfolio, ask him or her why not. And also ask them for proof that the sort of actively managed fund they are recommending to you has out-performed the index over the long term, after costs are taken into account.
2. Where are the blue chips?
Almost irrespective of their supposed investing brief, many of the funds recommended by IFAs turn out to be eerily similar in terms of the stocks they hold. So much so, in fact, that in the trade such funds have a name: 'closet trackers'.
And that's because while not actually being an index tracker -- and certainly not charging investors like an index tracker -- they hold much the same shares as an index tracker.
Just five shares, for example, make up almost 30% of the FTSE 100. The shares in question: HSBC (LSE: HSBA), BP (LSE: BP), Vodafone (LSE: VOD), Shell (LSE: RDSB) and GlaxoSmithKline (LSE: GSK).
So instead of holding such a huge chunk of the FTSE 100 in an expensive fund charging nearly 2% in fees -- that is, the fund your IFA would like you to buy -- you could easily simply hold the shares directly. Or through a low-cost tracker.
But IFAs rarely point that out. Odd, isn't it? The moral: whatever your fund's investing remit seems to be, make sure that it isn't simply a closet tracker in disguise. If it is, then there are cheaper ways to buy the same stocks.
3. Why trade?
IFAs love to give the impression that they're busy fellows, constantly on the lookout for opportunities to show their worth and help you. Especially when that 'help' involves trading commissions and fees.
One IFA that I know even has a computerised system that alerts investors to poorly performing funds, offering to switch the investment into better-performing ones.
If that isn't 'buy high, sell low', then I don't know what is. But the fact is that all investments -- and especially funds -- have periods of under-performance. Even investment greats such as Anthony Bolton and Neil Woodford.
And in each case, the investors who got wealthy from the skills deployed by Mr Bolton and Mr Woodford were those who held their nerve and waited for mean reversion to work its magic. And not those who jumped ship at the first grey cloud.
In short, churning your investments is a trading policy, not an investment policy -- and few indeed are the number of long-term successful traders. Remember the words of Warren Buffett: "My ideal holding period is forever."
So if your IFA suggests a spot of churning, ask him or her what they know that Warren Buffett doesn't.
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> The Motley Fool owns shares in GlaxoSmithKline.
