Passive/Active

[darreni]

JulianPH said:

Derek Chevalier said:

What makes you say that?

Because I think it would be a sound business model.

You would need to be charging magic circle lawyers hourly rates & even then you'd struggle.

[JulianPH]

I don't know. £150 an hour, 7 hours a day, five days a week, say 45 weeks a year is £236,250 a year with 7 weeks off.

That is the same as a 3% initial fee on £7.875m of new business or 1% a year on £24m of asset.

I never understand the logic of it penalising smaller investors being an issue when it is never an issue to penalise larger investors.

[JulianPH]

Derek Chevalier said:

Surely you have more exposure if you advise on a case size of £1mm and make a mistake than one of £50k (and assuming it took the same amount of your time to complete both examples)?

Coversely, your flat fee may mean the punter with the £50k portfolio is hammered by your charges as a % of his portfolio thus making it uneconomic for him.

As an aside, I wonder how price sensitive typical punters are...

I think the idea, as a professional, would be not to make mistakes! In any event, advisers always justify asset based fees on the basis the larger the assets the more work involved, so assuming the same amount of time to do a £50k portfolio and a £1m portfolio would appear to be (a) wrong or (b) exposing a lies behind asset based charging.

As I posted above, in the asset based model it is the investor with the largest portfolios that is being hammered with charges - I never hear advisers moaning about that.

I think you will find they were very price sensitive if they understood percentage based charges on a pounds and pence level.

Don't get me wrong, I think financial advisers are very much needed, it is just the level or remuneration (hidden by percentages on an ongoing basis) that I am focusing on.

[darreni]

JulianPH said:

I don't know. £150 an hour, 7 hours a day, five days a week, say 45 weeks a year is £236,250 a year with 7 weeks off.

That is the same as a 3% initial fee on £7.875m of new business or 1% a year on £24m of asset.

I never understand the logic of it penalising smaller investors being an issue when it is never an issue to penalise larger investors.

Is that plus vat or inc vat per hour?

Your figures are nowhere near the level needed to support a business offering regulated financial advice to retail clients.

[JulianPH]

darreni said:

JulianPH said:

I don't know. £150 an hour, 7 hours a day, five days a week, say 45 weeks a year is £236,250 a year with 7 weeks off.

That is the same as a 3% initial fee on £7.875m of new business or 1% a year on £24m of asset.

I never understand the logic of it penalising smaller investors being an issue when it is never an issue to penalise larger investors.

Is that plus vat or inc vat per hour?

Your figures are nowhere near the level needed to support a business offering regulated financial advice to retail clients.

VAT would, naturally, be on top of this.

What metrics have you used to come to the conclusion that a fee charging adviser bringing in almost quarter of a million a year would not be viable?

I'm genuinely interested as your blanket statement does not stack up in my mind.

[darreni]

JulianPH said:

What metrics have you used to come to the conclusion that a fee charging adviser bringing in almost quarter of a million a year would not be viable?

15 years of owning & running an IFA practice.

[JulianPH]

darreni said:

JulianPH said:

What metrics have you used to come to the conclusion that a fee charging adviser bringing in almost quarter of a million a year would not be viable?

15 years of owning & running an IFA practice.

I sought of got that! I meant a specific breakdown as to why the financial metrics of my proposal would not, in your opinion, work.

Costings per head for office space, marketings, FCA levies, PI insurance, support staff, etc. I fail to see how this would amount to more than the income generated on my proposed fee basis...

[anonymous-user]

What the punters really need is Robo-advice.

Which just happens to rhyme with No-advice.

...compared with that nonsense I suspect JulianPH is onto a winner!

[anonymous-user]

By the way, JulianPH and WindyCommon seem to make a lot more sense than most of the "financial advisers" I've ever encountered.

As for the active/passive debate,

• Will a passive fund ever out-perform the market? No
• Will a passive fund ever equal the market? No, running costs and time lag make that impossible.

• Will an actively managed fund out-perform the market? It might.
• Will an active fund cost much more than a passive fund? No

[JulianPH]

rockin said:

By the way, JulianPH and WindyCommon seem to make a lot more sense than most of the "financial advisers" I've ever encountered.

As for the active/passive debate,

• Will a passive fund ever out-perform the market? No
• Will a passive fund ever equal the market? No, running costs and time lag make that impossible.

• Will an actively managed fund out-perform the market? It might.
• Will an active fund cost much more than a passive fund? No

In order:

No
No

The odds are with you over a short period of time, but against you for a longer one
No, much less. But but passive management doesn't offer any value. It is this you need to look at, be it Alpha (Stock p0icking) or Beta (asset allocation).

Either way you should not be paying 100Pbs (1%) or more.

[JulianPH]

rockin said:

What the punters really need is Robo-advice.

Which just happens to rhyme with No-advice.

...compared with that nonsense I suspect JulianPH is onto a winner!

Robb-advice is the financial services industry entering the market with 54k dial up modems.

It is painful to see companies (Distribution Technology) say they can reduce an online ISA application from four hours to one and a half.

Who would consider this...?

[JulianPH]

rockin said:

By the way, JulianPH and WindyCommon seem to make a lot more sense than most of the "financial advisers" I've ever encountered

Thanks, rockin,

That may be because it is is/was our own money being taken by financial advisers using it to 'subsidise' their income.

I have no issues with someone charging for their time though.

That is how everyone else does it...

[Ginge R]

WindyCommon said:

Agree with all your numbers, but note they are for investment only. By "end to end" I meant including platform/wrapper (say 25bps) costs and advice/planning (typically 50-100bps, I offer no comment..) charges. My experience is that client facing advisers know they are in for a hard time when all of this gets beyond 200bps. Rightly so!

Bang on.

[Ginge R]

Derek Chevalier said:

Surely you have more exposure if you advise on a case size of £1mm and make a mistake than one of £50k (and assuming it took the same amount of your time to complete both examples)?

Coversely, your flat fee may mean the punter with the £50k portfolio is hammered by your charges as a % of his portfolio thus making it uneconomic for him.

As an aside, I wonder how price sensitive typical punters are...

Good points.

Invariably, a £1m portfolio will be require more intricacy due to the life stage of its owner, and be more time consuming.

[Derek Chevalier]

JulianPH said:

rockin said:

What the punters really need is Robo-advice.

Which just happens to rhyme with No-advice.

...compared with that nonsense I suspect JulianPH is onto a winner!

Robb-advice is the financial services industry entering the market with 54k dial up modems.

It is painful to see companies (Distribution Technology) say they can reduce an online ISA application from four hours to one and a half.

Who would consider this...?

I don't really understand robo-advice - seems expensive for what it offers

[Jon39]

JulianPH said:

My SIPP/ISA/investment management company has this active managed approach and the result is my 'adventurous' portfolio caries the same risk as a stock picking active manager's 'balanced' portfolio and has grown by 24% over the last year.

It is, of course, horses for courses, but their is another dimension in the active/passive argument.

Hello fellow marque enthusiasts (OP and youself).

I don' t often post on this finance forum, but for the last couple of years have mentioned at the year end, my own investment result. The only reason is to perhaps tempt those interested in investment, to consider the long-term approach.

If your 24% increase is the 2016 calendar year, then you beat me (22.17% vs Market 12.45%).
Well done, you were probably on the right side of the Sterling value change.

My understanding of the The Active / Passive debate, seems to usually mean; Active using a fund manager to trade equities etc., and Passive purchasing an index tracking fund.

My own system could probably also be called passive, because 30 years ago I began investing in (mostly) large UK businesses, which I thought might make steady progress through the inevitable economic cycles. Once purchased, the whole portfolio would remain largely unchanged provided the performance was generally acceptable. If the overall annual percentage continues to be good, then why ditch the losers that year? If company management remains excellent, even the losers in one year can unpredictably have their winning years. I like this system because the work involved is minimal, total costs and fees are the lowest possible (£30 plus VAT last year), and compounding gradually takes effect. It also became clear to me that dividends form a significant part of the overall return, particularly important during the down years. Dividend payments can of course be debated, because shareholders are being given back money which they already own, and if spent can harm future performance.

I stumbled into adhering to this long-term holding system, by being very fortunate with my initial selection of a few businesses, that did perform well. I later discovered that a particular gentleman in USA, likes the identical approach. It is certainly a system that works very well, but you do need to begin with an interest in business, economics, market history, oh and liking numbers and spreadsheets helps, to learn which industry sectors and businesses have long-term investment attractions.

New investors should keep in mind, that fund management companies inevitably have a different motivation from their customers. Usually the investors want to increase their savings, but the fund company would normally need fee income to pay their bills. Frequent trading within a fund incurs cost, but the customer might not realise they are paying.

Edited by Jon39 on Tuesday 30th May 10:14

[JulianPH]

Hi Jon39

My portfolio was to the end of March this year and has active asset allocation investing in ETF trackers.

What you are doing is active stock picking as a fund manager would, but doing it yourself rather than paying someone else, which is brilliant if you have the time, knowledge and confidence - for which you should be applauded.

[Jon39]

JulianPH said:

Hi Jon39

My portfolio was to the end of March this year and has active asset allocation investing in ETF trackers.

What you are doing is active stock picking as a fund manager would, but doing it yourself rather than paying someone else, which is brilliant if you have the time, knowledge and confidence - for which you should be applauded.

Thank you Julian.

It was fairly time consuming for me in the early days, but now it is just reading, sometimes record keeping, plus about fifteen minutes for a spreadsheet update, following the close of each business week.

Apart from corporate actions, my last purchases were a long time ago, at the end of 2008, so no regular work on buying/selling.
I cannot resist buying, each time there is a crisis though. Funny that, because I get the impression everyone else seems to be selling.
The portfolio fund has risen 198.6% since those purchases. The UK market is up 88.1%, so you will understand why I don't spend time doing trading transactions.

My best time ever has been since the UK referendum. I certainly did not expect that, but as you know, people out of the market can miss out considerably, when unexpected up-turns do occur.



(The V------- magazine arrived this morning. Don't look at that, because there is a 7 page article which might prove very tempting for you.)

Edited by Jon39 on Tuesday 30th May 15:32

[JulianPH]

Derek Chevalier said:

I don't really understand robo-advice - seems expensive for what it offers

Robo-advice simply shifts the time burden from the adviser to the client and is usually very restrictive (ISA wrapper only) and so in my opinion is a misselling time bomb waiting to happen.

Fortunately it is not gathering much traction as this element of the financial services sector does not appear to realise that people will not put up with real world time frames in an online environment. People expect online transactions to take minutes, not hours.

To summarise on the adviser fee debate so far, advisers justify hammering big portfolios to subsidise small ones by saying there is more work involved in big portfolios. Whilst this is likely to be true, they do not follow their own logic when applying this to hourly charging and say this will hammer small portfolios (despite their admission they take less time - and therefore would be charged less as a result) and this is is a bad thing (when hammering the bigger clients, apparently, is not a problem). I suppose this is another example of the rich needing to pay their "fair" share (fair being a multiple of what everyone else pays for the same thing).

And to try and bring this thread back on track, passive investing is certainly cheap, but given asset allocation in the main driver of returns then active asset allocation management can add strong value and would be the first thing I would be prepared to pay for. Active stock-picking management can also add value providing (as with managed asset allocation) the the returns outweigh the costs.

So there is no right or wrong, just different approaches. Jon36 manages everything for himself and is doing a fantastic job of it. This is the cheapest route but you have to run the asset allocation and stock selection yourself. If you are up to that, then you shouldn't need to consider paying someone else.

If you are not quite as sure then you could consider using passive ETF trackers instead of selecting the stocks yourself providing you are confident with running the asset allocation (and aware of its importance).

If not, consider active asset allocation portfolios with passive underlying investments. If you want to go the whole way consider the same, but with active stock management.

As always, the most important thing is to identify exactly what you do know (and are confident about) and be completely honest with yourself about what you don't know (regarding asset allocation and stock picking). Then decide what skill sets it is best to bring in (and who best offers these) having assessed this.

It is just like buying an investment property;

If you know the best areas/streets to get the maximum gains and can adapt to changes in this then you would not pay someone to advise you on this. However, if you don't, then it might be wise to pay an adviser - but as the one paying make sure you know exactly what the fees are, how long they last, and what you are getting in return.

Equally, if you can see through the existing condition of a property and know how to balance the right level of investment for the renovation to maximise the property's potential (and can be on site to handle the kitchen, bathrooms, flooring, decoration, landscaping, etc.) yourself - then this roughly equates to the same thing as running the asset management side of a portfolio. If you have that skill set and the time to place ongoing focus on the then you don't need to pay someone else to do this for you. If you don't, then it might be wise to pay someone who does.

If you also know how handle the plumbing, electrics and other renovation aspects, this is akin to you knowing about asset allocation and stock picking (and therefore you don't need to pay someone else to do this for you). And if you don't, then it might be wise to pay someone who does.

Equally if you know some of these things, but don't have the time to implement, monitor and make changes when needed regarding them, it again might be wise to pay someone who can.

A crude analogy, I know, but the best I can put together in 10 minutes!

[JulianPH]

Jon39 said:

Thank you Julian.

It was fairly time consuming for me in the early days, but now it is just reading, sometimes record keeping, plus about fifteen minutes for a spreadsheet update, following the close of each business week.

Apart from corporate actions, my last purchases were a long time ago, at the end of 2008, so no regular work on buying/selling.
I cannot resist buying, each time there is a crisis though. Funny that, because I get the impression everyone else seems to be selling.
The portfolio fund has risen 198.6% since those purchases. The UK market is up 88.1%, so you will understand why I don't spend time doing trading transactions.

My best time ever has been since the UK referendum. I certainly did not expect that, but as you know, people out of the market can miss out considerably, when unexpected up-turns do occur.



(The V------- magazine arrived this morning. Don't look at that, because there is a 7 page article which might prove very tempting for you.)

Edited by Jon39 on Tuesday 30th May 15:32

Jon - that is a fantastic result and you should be very proud. You have outperformed many, if not most, most professional fund managers!

You have also proven the old adage, it is not about "timing" the markets, it is about "time in" the markets".

Great to hear such a success story here,

Julian