Humans are bad investors. Unfortunately, they think they are great at it. So how can you protect yourself from yourself?
Here are your need-to-knows in finding an investment manager who might help.
You are a bad investor
If you have money, you were probably successful. Congratulations. That does not make you a good investor. Research shows that there is no correlation between investment results and wealth, social status, or education.
Believing otherwise usually results in the accumulation of ego-driven investments. And those rarely end well.
Your investment manager is not much better
Few UK managers are experts in strategies which they invest clients’ money into. But that does not stop them claiming otherwise. These managers regularly (and sometimes outrageously) overstate their competence.
The truth is that most managers excel at sales and service. Most of them do not, on the other hand, excel at research and investing.
That would be fine (sort of) if they could admit the limits of their knowledge. But they believe their own hype, leading them to stake out ill-informed positions using other people’s money.
Protecting you from yourself
Despite the foregoing, investors who hire managers still earn better returns over time. This is because managers protect you from yourself while providing baseline advice.
But the best managers are honest about where they add value (and where they don’t). They don’t need to be Warren Buffett or our very own Jason Hsu — they just need to be trustworthy, informed, and engaged.
The value of product
UK firms invest more in sales and marketing (service) than in-house investment research (product). Most are not managers at all — they are sales and distribution platforms buying third-party products.
It’s no surprise that these managers often put their clients’ money in trendy active funds with high fees. Our advice: when selecting an investment manager, find one that prioritises research, not sales.
Transparency is key
Transparency and trust are at the heart of the manager relationship.
Steer clear of managers with complex fee structures. Instead, look for simplicity and predictability.
Moreover, it pays to avoid managers who cannot speak directly about their research. Managers who outsource their product may struggle to respond to these questions — but you deserve answers before you turn over your hard-earned cash.
Selecting a quality manager requires due diligence. However, if handled properly, it’s a decision you’ll make only once in a lifetime.
But if it still sounds too daunting, you might be better off without a manager at all. Just put your money in a low-cost, diversified exchange traded fund. Then walk away and check back in 20 years.
Neil Cockerill is a senior investment manager at Henderson Rowe