As all IFAs have learned during 2022, following machine led biases is dangerous.  For as long as I can remember there have been two conventional theories.   Firstly that bonds are low risk, and equities are high risk.  Such a flat statement ignores the price movements, and last year bonds fell by as much as half.  The illusion is well and truly pricked.  The text books are being revised already! 

The second theory is that the older people are, the less risk they should take, as their time horizon is shorter.  Rubbish! The elderly have stable incomes provided from pensions, government pay-outs, have few liabilities, excepting their own health, and generally can afford to lose in the short term.  Their lives are stable, unlike the thrusting young with mortgages, school fees and incomes that can be ended in a management cull instigated from on high with no notice at all.

So it is not surprising that one of the great failures of retail financial advice has been robo advice.  Millions have been thrown away finding out that customers aren’t going to take advice from a machine.  Advisers fall around laughing, but robo failure does hide another threat – passive investments and ETFs on self serve platforms.

Sure as night follow day, funds have been flowing from active to passive funds, the charge led by exchange-traded funds and the numbers are even more marked in the US.  While indexed investing was the big growth area in the 1980s and 1990s ETFs are leading the charge now – putting active fund managers out of work.  In the UK the ETF offshore domicile means the dividends are paid gross – further incentive to park them in pension funds. 

While no one knows exactly what proportion of assets are managed passively, some commentators think that we are close to the tipping point now, making it easier than ever to pick stocks and funds to beat those same indices.  

The key role for IFAs then is to overcome the threat with courage.  Take the lead and put forward propositions that are grounded in sense, and independent thought.  They buy your advice, and look to you for leadership, and you provide that by research, study and communication.

IFAC this year will be running investment committee seminars, to help provide structure to your firm’s processes.  We will be delivering seminars every Friday from March at 10am.  We hope that these zoom meetings can be live, interactive and educational.