For industry veteran John Spiers, successful investment is like cooking a gourmet dinner. “Even if you take the effort and go down to Borough Market and buy some really good ingredients, unless you select them in the context of the other ones, you could end up with a very unpleasant meal.” And this, he says, is where many self-directed investors get it wrong. “It’s not enough to just find some good funds. They’ve got to blend together. It’s really hard for a private investor to do that.”
The problem is that the sophisticated software and analytical techniques that professional managers use to analyse things like underlying investments, asset allocation and currency exposure are not really accessible to retail investors. Similarly, discretionary management, where an expert will make decisions on your behalf in order to optimise performance, has historically come with high upfront costs and hefty management charges. Simply getting financial advice and then making your own decisions has not been made easier by recent regulation: restrictions on how financial advisers can operate have widened an already yawning advice gap, with many people not bothering to seek assistance even when making decisions over life-changing sums of money.
Increasingly, robo-advisers are being cited as the solution to this conundrum. Robo-advice essentially refers to the use of computer algorithms to construct portfolios for investors online. You are asked a series of questions about risk appetite, time-frame, and investment size, and the algorithm will select funds (usually ETFs and trackers) that it calculates will get you where you need to be, and at a lower cost to traditional discretionary management.
Confusingly, however, “robo-advice means different things to different people,” says Spiers. “Some services that claim to be robo-advice are nothing of the kind, because they don’t provide any advice.”
This is where Spiers’s new company EQ Investors comes in. “I’ve never wanted to run a business that just deals with rich people, although that tends to be the most profitable part,” he says. Having moved on from his previous venture, investment management giant Bestinvest, he is building an advice-led discretionary wealth management boutique that seeks to cater for investors with small, medium and large portfolios through different strands of the business. Robo-advice is on offer, but there is also a strong emphasis on regulated personal advice – whether on the phone or in person.
Spiers tells me what he’s seeking to achieve, why he’s not too worried about Brexit, and what he sees as the future of investment.
What are the advantages and limitations of robo-advice?
With model portfolios, discretionary management can now be cost-effective for people with much smaller sums to invest. This is why the game has changed. When I started up in a previous era, you couldn’t get access to discretionary management unless you had quite a lot of money.
But there is a lot of confusion about what is meant by robo-advice. We do have a robo-advice service: Simply EQ. But we strongly encourage people to come and talk to us rather than just online. And most people don’t just want to be online. These decisions, they’re so important for people. It’s their life savings in some cases. Most people are not comfortable clicking a button and saying “that’s done”.
Why is advice still so important?
Nothing beats being able to chat through a situation with someone who’s qualified, partly to just prevent people from doing something rash. There’s quite a lot of evidence that, over the last 20 years, investors have sacrificed half of the return from the index by chopping and changing. And quite a bit of that happens when people get panicky about markets. We all feel that. We’re hardwired to put a lot of emphasis on fear because that kept us alive in an earlier era. But that type of emotional response isn’t great when dealing with stock market volatility.
So it’s very helpful to be able to pick up the phone to somebody and say “I really don’t like what I’m hearing in the papers and I’m thinking I should be cashing in”. You can talk to someone who can put all this into context and most of the time say “that’s probably not a very good idea”.
The chancellor didn’t end up reforming pensions in his Budget, but many still expect change to come in the next few years. Would moving to a flat rate of pension tax relief put higher earners off pensions entirely?
I think it will. If you’re expecting to remain on a similar tax rate in retirement, and higher than whatever the flat rate is, it’s likely to be a pretty poor deal. And given that some people – even with the generous incentives that there are at the moment – don’t save into pensions because they don’t trust what the government will do when they come to retire, if you’ve got a less favourable environment, I don’t see many higher rate taxpayers being interested in pensions at all.
We would be looking at a complete change in the landscape – where pensions will become the preserve of the moderately wealthy and those that aren’t wealthy. The rich, except where they’ve got employer contributions, won’t see this as something they’ll put money into. They’ll do Isas first and then start looking at Venture Capital Trusts (VCTs) and EIS, which is quite dangerous because those markets are very specialist and suffer from excess of demand over supply.
Demand for VCTs is likely to rise given new restrictions on what top rate taxpayers can put into pensions, but supply is also being limited by new limits on what VCTs can invest in. What is the likely result?
Management buy-outs are no longer permitted. They were a very significant source of deals. And then, from 6 April, you won’t be able to invest in renewable energy. So the universe of potential investments has gone down pretty sharply at a time when demand is on the increase. That leads to trouble in investment.
What do you mean?
Investment managers are highly incentivised to raise more money. When they’re pushed, they’ll persuade themselves that there’s some new area where they can relax their investment criteria and it’ll all be ok. But history suggests it isn’t ok.
There’s a big split in the investment world over the impact of Brexit. Neil Woodford released a report saying it won’t make much difference either way, while BlackRock said it would be awful. Why is there such a difference in opinion?
It’s partly because we know so little, especially in terms of what form Brexit would take. It’s not surprising that there’s a tremendous range of views. People tend to think about it in a one-dimensional way: will it be good or bad? But it’s a much more complex situation than that. And it’s possible that it’ll be bad in the short term but good in the long term.
Uncertainty is never good for anyone. We’ve got that now until 23 June, and if the vote is for leave, we’ve got years of uncertainty. That’s not good. But equally, I’d agree with the people who have a view that the EU doesn’t work at all well at the moment, and overall it’s probably not very helpful to us. I haven’t made up my own mind about how to vote, because I can’t decide yet whether we’d be better waiting for the EU to break up than for us to get blamed for it doing so.
Is an EU break-up likely?
It’s absolutely inevitable. The euro cannot possibly function with the countries that are in it at the moment. It’s a question of when. Quite a few of those countries would need to come out of it.
Then there’s the border. Every day we’re seeing evidence that effectively it’s over.
Should short-term Brexit risks be front of mind for investors?
Bearing in mind that any sensible person will have a very well diversified portfolio, and most UK equities are not UK equities but just happen to be listed here, most people’s exposure to domestic UK companies is pretty small. I think no one’s suggesting that it’s going to be a disaster economically really. Some politicians are. But people who are doing the economic and financial analysis, they don’t think it’ll be that stark. The only obvious precaution people need to be thinking about is whether there is a risk of a big further drop in sterling.
With a US election this year and the EU referendum, are you paying more attention to political risks at the moment?
I think the answer is no, because it’s easy to overestimate how much governments might do, especially a US President. See how little Obama has actually managed to do. Congress blocks so much. Over here, even if governments change rules, it’s people, it’s business who are generating the wealth. Even if something happens that we might not think is very helpful, fortunately, there’ll be thousands of people trying to find a way to overcome the problems. You only need to look up the road from the City and see all the vitality of these great businesses to feel very positive about the human spirit and what the UK is capable of achieving.
Presumably you have a positive long-term view of the global economy?
No I don’t, actually.
We’re in a secular demographic change in the developed world. As people get older, they tend to spend less. That’s a big change that people aren’t ready for. The productivity gains that happened in the past are proving very elusive now. I think everyone’s coming to a realisation that the expectation every year that people at large would be better off just isn’t going to be true any more.
Is there any way out of this? It’s a miserable projection.
The way out of it is for people probably to become less focused on financial status and more on general enjoyment of life. You can have a lot of fun in this world without much money.
What impact will an ageing population have on investment returns?
The baby boomer generation has been very heavily invested in equities and the thought always was that, at some point, they would reduce that exposure. There was always a question of who would buy all these equities when they become sellers. But pension rules have changed in the UK and the need to buy an annuity has now gone. For a lot of people, they should probably always remain invested in equities. You need exposure to real assets to make sure you don’t get wiped out by inflation. Also, when you’re pretty well off, people are seeing that their pension is now a fantastic inheritance tax efficient asset. In effect, you’re investing for the next generation, so the time-scale is even longer. People coming out of equities maybe isn’t going to happen, at least in the UK.
EQ Investors is very interested in ethical investment and we’ve seen a number of corporate scandals wipe billions off the value of companies in the past few years. What needs to change?
During my lifetime, I’ve seen this remarkable change. Back in the 1970s, the criticism of the management of big companies was that they were too dozy. Then private equity guys came on the scene and started making money by incentivising management with very generous incentives. Hey presto, those companies performed brilliantly. Other institutions realised this was the way to keep companies going.
The old dozy management that we were critical of, they were paid a fair amount, but not a massive amount, and the company pension was worth holding onto. The trick was not to get into trouble. There was no incentive for bad behaviour. You’d just lose your job and you’d find it very hard to get another one.
I was all in favour of greater incentivisation when I was working as an investment analyst in the 1970s and 80s. But it’s gone way too far. We now have a system where people have the possibility of making life-changing amounts of money in just a few years. We’re not seeing long-term investment decisions being made.
Look at the UK and US, corporate investment is ludicrously low. Management’s first decision is always to buy back shares with any spare cash, not to make a potentially risky investment. But just remember, the management are being driven by investors.