VALUE INVESTING
Income Investing Without An IFA

By Stephen Bland (TMFPyad)
October 14, 2005

Okay, you've got one or both elderly parents living. They have a few quid as a result perhaps of trading down property and accumulated savings or whatever. The source is unimportant. Their pensions are inadequate to live on and so they need some advice on how to invest their cash in order to provide additional income.

They ask you for suggestions on ways of achieving their aims. You're not really qualified to answer it. You're not entirely dumb but you have little knowledge of income investing, the various methods, the associated risks, onerous impositions and so on.

So what do you do? Seek advice.

Although that sounds simple, it is fraught with problems. Many of those offering advice will be biased. Not only because they might profit from it as commission based IFAs, though that's one clear difficulty, but because people, professionals and private, are frequently ruled by personal prejudices. So even a fee-based IFA with no commission influenced bias, will in practice have certain favoured areas of investing.

As a generality such people tend to be institutionalised in my experience and I have dealt with a few back in my accountancy practice days. What I mean is that too often they will recommend financial products from insurers or funds, even if their remuneration is by fee from the client and not commission from the provider. The whole background of such people is from the institutional side of investing. They all belong to the same golf club, independent advisers, tied advisers and the product providers themselves. Essentially they have a broadly similar set of beliefs about investment.

True independence or originality of thought is not something often to be found amongst even fee-based IFAs in my view. The result is that if you seek fee based advice from an IFA on investing for income, in the belief that this will serve you better, I think there to be a fair chance that you could well end up with something not too dissimilar to the advice of a commission adviser. Namely, the income products of insurers and funds. This is how a lot of them will view the income investing world, whatever their remuneration method.

Of course we all suffer from prejudices, myself included. For example when I hear the word insurance, I reach for my gun. Not irrationally mind, the evidence of disgracefully poor performance by insurance company investments coupled with appallingly onerous conditions is not exactly hard to find.

Readers will guess what I'm leading up to. Yup, that's right. High Yield Portfolios. What a surprise!

Something toward which I am pleased to state that I have a most positive bias. How many theoretically unbiased fee based IFAs are going to recommend HYPs to a person in the above situation? And why not? Because they perceive individual shares as too risky is why not and don't bother to look further. An institutionalised mind cannot see further than institutional products, however they are remunerated.

To be fair to IFAs, something I'm not inclined to be but for the sake of this article I will, if you asked private individuals about income investing, few would go for the HYP approach. So where does the majority of capital available for income investing end up? I'm guessing here but a lot of it will be in bank deposits, despite the interest rate fluctuation risk. A lot will be with insurance company schemes, some will be in income funds, some directly in gilts or other bonds.

But HYPs? Relatively very little I suspect. It's more than it used to be following promotion of the idea on the Motley Fool over the last five years. I know there are several hundred Fool HYPers out there, probably totalling a few million pounds, and many others who realised the effectiveness of such an approach long before the Fool existed. However, compared with the investment in other areas like the above, it will be next to nothing. But I am gratified by the thought that the few million invested in HYPs by Fools is a few million less for the insurers and a darn sight more return for the investors. It pleases me no end that I've had something to do with keeping a little bit of investors' money out of their hands and in the process improved returns too.

There is overwhelming evidence that long-term investing in high yield shares is a profitable and critically, low risk, way to go. But the perception in many minds who have not studied the approach is that it is high risk. Despite all the evidence to the contrary.

But then, why spoil a good set of perceptions with the facts?