2.4.7 Where to transact and when to seek advice

Two key questions to ask when making investments are ‘where do I go to transact business?’ and ‘should I seek advice first?’.

In terms of where to go, as noted in the previous sections, investors are currently spoilt for choice. Traditionally, investors would go directly to a financial services product provider like their bank, building society or insurance company. Alternatively, a financial adviser could be employed – both to provide advice on the placement of investments and to carry out the practicalities of completing the acquisitions or disposals of assets.

In the contemporary world, the internet provides the medium for fluid investment management transactions. This makes for ease in terms of the selection of investments and for transactions, although investors will need to consider whether advice is needed before keying in the instructions to an investment platform.

The issue about advice is something all investors should consider carefully: am I really sufficiently knowledgeable about the attendant risks and returns to make investment choices?

Following the introduction of new rules in 2013 requiring investment providers to be fully transparent about their costs, the proportion of investors deciding to invest privately, rather than rely of advice, has increased. A poll of investors by the online investment platform, Interactive Investor, found that one in five now prefer to make their own investment decisions, having previously relied on an adviser to assist them (Sunday Times, 2014).

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MARTIN UPTON

Anthony one big decision that investors have to make is do I take financial advice before making my investments or do I so to speak fly solo and make my own decisions? What's your advice on this?

ANTHONY NUTT

Well my advice would be that depends upon how sophisticated you are in understanding financial matters. If you're coming to the investment arena for the very first time, and know little about financial matters then I would seek advice. And sadly the quality of advice you get depends on how much your're going to pay for it. If you are an accountant yourself, if you understand financial matters on a much more significant understanding of these financial matters. Then by all means fly solo, go it alone, do your own homework, understand the risks, look at your aims and objectives

MARTIN UPTON

You talked about fees there, and the investor having to pay for advice. And you know there's been a lot of debate and discussion about the fees that are paid to fund managers, what are your views? Are those fees generally in order or are they excessive?

ANTHONY NUTT

Well I think Martin it really does depend upon the product you are choosing to invest in. There is no doubt in my mind that some products are heavily overpriced. They're weighted too much in terms of the fee towards the underlining fund manager, I think performance fees within the hedge fund communities for instance. And at the other end of the spectrum there may be index tracking, there are products which are very lowly priced and can retain the same sorts of returns as an index by their very nature. So it does vary enormously and it is important to understand what level of fee you will be paying. Now I do think the government and the regulator has had a very useful role to play in this in recent years in forcing the investment community, investment professionals, fund managers, independent financial advisors to make more explicit what their fee charges are. So you can make a much more educated guess now than what was the case in the past in terms of what your fee levels are likely to be. I should say at this point that the initiatives we've seen from governments in the past to make very simple investment products very lowly priced hasn't really worked. The investment community hasn't been very keen on taking up some of those very lowly priced products because it can be quite an expensive process to provide a product to the retail community in particular at a very very low price.

MARTIN UPTON

So by the sound of it you think the regulators are doing a pretty good job then in terms of regulating the fees?

ANTHONY NUTT

He's doing a much better job I would say than has been the case in the past. The City understands, the investment community now generally understands what's required of them in terms of an appropriate level of fee charging

MARTIN UPTON

But it's also important that the personal investor doesn't turn a blind eye to that percentage which they're paying in terms of fees, it's typically a small percentage and people are maybe inclined just to ignore it and not think about how it impacts upon their investment return over the longer term, is that a fair observation?

ANTHONY NUTT

You know, my observation over the year would be that actual the retail investor does look at the level of fees he's paying. He looks at what the return has been and he does make a judgement about the level of fees he's been paying. And too often I think the level of fees have discouraged him from investing perhaps when he should have been investing. I do think people do look at fee charges, they are concerned, they have been concerned about fee charges and the press has done a relatively good job of taking up some of the more extreme examples of too high a fees.

MARTIN UPTON

A fund manager that underperforms particularly year after year, should they be repaying their fees to the investor?

ANTHONY NUTT

I don't know how the fund manager would repay those fees quite frankly. If the fund's underperformed significantly, investors tend to take their money out over a prolonged period of time, and his funds dwindle and his business risk rises and he goes out of business in theory. But I don't think we'll ever see under performers reimbursing fees because fees go to provide a lot more simply than buying and selling investments. There's a good deal of admin that takes place behind that.

MARTIN UPTON

Yes I mean a certain amount of the fees which you do pay go towards such things as research, undertaken by the financial firms.

ANTHONY NUTT

Yes I think that's true, there is a good deal depending on the size of the firm there's a good deal of resource applied to researching companies and the underlying investments they offer the retail investors.

MARTIN UPTON

Thank you.

ANTHONY NUTT

Thank you.

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Listen to the views of retired investment director and fund manager, Anthony Nutt, on the issue of when to take advice. Then, in the next section, we’ll run through a check list to help you form your own view of this important matter.