The Evidence-Based Investor

Tag Archive: Paul Lewis

1. Eight tips for finding a suitable adviser

   January 4, 2023 11:09 am Comments Off on Eight tips for finding a suitable adviser

    

    

   By ROBIN POWELL

    

   Financial advisers have had a bad press in recent years, and I can understand why. But my firm belief is that having a good adviser to help you plan your financial future and who can turn to when you need them is hugely valuable. So how do you go about finding a suitable adviser?

   In a new book, released this week, the journalist and broadcaster Paul Lewis provides some useful pointers on this subject, and explains some of the pitfalls. The book is called Money Box, after his weekly programme on BBC Radio 4.

   Before we look at Lewis’s recommendations for finding a financial adviser, we should define what we mean by financial advice. It’s a really important point to understand.

   There are, in fact, many different types of adviser, with a wide variety of service offerings and areas of expertise. There are, for example, financial planners, and we’ll discuss those in more detail later; increasingly, there are also financial educators, coaches and mentors.

   The key thing to remember is that if you want advice about specific investments, or if you want someone to manage your money for you, you need a regulated financial adviser. Most financial coaches and mentors are not regulated to offer advice, which means that, if they do offer advice and you decide to act on it, you aren’t protected if things go wrong.

   With that explanation out of the way, here’s Paul Lewis’s guide to finding a suitable adviser to work with.

    

   Tip 1: Decide if you actually need advice

   Not everyone needs financial advice. It is perfectly possible, for example, to manage your own investments. Indeed, for young people or those with small amounts to invest, that may be the best option. There is free advice available from a government-funded resource called MoneyHelper. Its website, https://www.moneyhelper.org.uk, provides helpful and reliable information on a whole range of money-related issues. If you have a question specifically about pensions, MoneyHelper also offers a service called Pension Wise, which has its own helpline.

    

   Tip 2: Don’t get advice off social media

   There are some very good financial educators online. Sadly, though, they are far outnumbered by the bad ones, and distinguishing between the two can be tricky. You should therefore never choose an investment on the advice of an online influencer. Using social media to research investments, says Lewis, “is like fish researching the world above the water by sampling the food fishermen throw in.” His other golden rule is never to respond to an advert on Google; these begin with “Ad” in bold before the URL.

    

   Tip 3: Only use an adviser who is FCA-regulated

   Anyone can call themselves a financial adviser, but as we’ve already explained, they need to be regulated by, and registered with, the Financial Conduct Authority to advise on specific investments. You should never buy investments from people who aren’t registered with the FCA, however they describe themselves. Paul Lewis writes: “All these people are allowed to operate unregulated as long as they only sell unregulated investments in things like whisky, property or art. Your money is completely at risk.”

    

   Tip 4: Only use an adviser who is truly independent

   Under FCA rules, there are two sorts of financial advisers. The sort you want are called “independent”. This means that they have to look across the whole market for investment products before recommending a specific one. What you need to avoid are the second type of adviser, namely “restricted” advisers, who are tied to recommending products from a particular firm, or sometimes from a panel of firms. The problem is that restricted advisers generally avoid using that term, and many deliberately give a false impression that they are in fact independent. So be on your guard.

    

   Tip 5: Only use a chartered or certified financial planner

   There are around 33,000 regulated independent financial advisers in the UK. But only around 6000 of those are genuine financial planners. This is a crucial distinction. Proper financial planning offers far more value than financial advice alone. “The very best qualified financial advisers are chartered or certified financial planners,” writes Lewis. “They have put a lot of effort into being the good guys, and the chances of a bad guy or gal remaining in there is small.”

    

   Tip 6: Insist on paying in pounds, not percentages

   Another filter that Paul Lewis recommends you apply when choosing an adviser is to pick one who charges you in pounds. “Many advisers,” he writes, “will want to charge you a percentage of your money. Charging a percentage is like taxing your wealth. Drip, drip, every year some of your wealth becomes theirs.” The answer, he says, is to pay a specific, fixed amount, whether it’s for a one-off service or for ongoing help and advice.

    

   Tip 7: Consult online directories — but exercise caution

   There are several online directories designed for those who want help finding a financial adviser. Some directories are better than others. Advisers may pay to be listed, and, in the past, they could pay for higher positions. That should not happen now, but it’s something you should be aware of. There are three directories which Lewis recommends using to draw up a shortlist. The first is AdviserBook, which he suggests as your starting-point; the second is Unbiased, the oldest directory, which lists more than 18,000 advisers; and the third is a newer database called VouchedFor.

    

   Tip 8: Disregard firms without a good website

   Once you have a shortlist, Paul Lewis recommends that you carefully check each firm’s online presence, and discount any firm that either doesn’t have a website or whose site doesn’t provide the information you need. “Ignore the slick sales patter, which usually reads as though it is generated by a PR machine,” he writes. “The key question is: does it tell you what they charge?” If a site doesn’t give specific figures, “your first question when you meet them should be about charges and costs. If the answer is anything but clear, that is a warning flag.”

    

   Filter, filter, filter

   In summary, finding a suitable adviser you can really trust is a minefield. Even if you follow all eight of these rules when choosing an adviser, there is no guarantee that you’ll be entirely happy with the choice you make.

   The key, says Paul Lewis, is to apply appropriate filters. Are they regulated by the FCA? Are they truly independent? Are they chartered or certified financial planners? Are they totally transparent about how much you’ll have to pay? And do they charge fixed fees, in pounds, rather than percentages?

   Choose a firm that ticks all of those boxes and you should be all right.

    

   Money Box by Paul Lewis is published by Penguin Books.

    

   NEED MORE HELP?

   If you need more help finding a suitable adviser, you’ll find this website useful.

   Remember, too, that here at TEBI provide a service called find An Adviser.

   Wherever you are in the world, we will try to put you in contact with an adviser in your area whom we know personally, who shares our evidence-based investment philosophy and who we feel is best able to help you. If we don’t know of anyone suitable we will tell you.

   We’re charging advisers a small fee for each successful referral, which will help to fund future content.

   Click here and let’s get started.

    

   
   
   

   
   

    

   PREVIOUSLY ON TEBIEight tips for finding a suitable adviser

   Five things that stop people becoming wealthy

   Young investors are smarter than you think

   Investors, here’s why you need an plan

   Horizon risk: what is it, and how can it be mitigated?

   Regulators don’t understand financial advice

    

   © The Evidence-Based Investor MMXXIII

    

    

2. Start planning the life you want to lead

   October 13, 2022 1:26 pm Comments Off on Start planning the life you want to lead

    

    

   Robin writes:

    

   It’s been nearly two years in the making, but today my new book, co-authored with Jonathan Hollow, finally goes on sale.

   It’s called How to Fund the Life You Want, and you can order it here: https://tinyurl.com/how2fund

   There are so many people to thank, including our agents, Newson Wallwork Media, and the publishers, Bloomsbury Business.

   But most of all I’d like to thank Jonathan for his dedication and his extraordinary attention to detail. We’ve really pushed each other to make this book as useful and as readable as we possibly could.

   Enjoy it. But, more importantly, act on it.. and start planning the life you want to lead.

    

    

   
   
   

   
   

    

   WHAT PEOPLE ARE SAYING ABOUT THIS BOOK

   ‘This is such a valuable guide to DIY investing, I recommend you make this book your first investment.’
   Claer Barrett, Consumer Editor, Financial Times

   ‘If you’re serious about getting things right with your money – and avoiding costly mistakes – then set time aside to work through this excellent book. You will end up better off. No question.’
   Paul Lewis, Freelance Presenter, Money Box BBC Radio 4

   ‘Wonderfully researched, jargon-free, thought-provoking, interactive and engages the reader from start to finish.’
   Jeff Prestridge, Personal Finance Editor, Mail on Sunday

   ‘I’m often asked to recommend a good, essential book on investments within the UK tax and legal system. Until now, there wasn’t one. This book is now my go-to pick.’
   Steve Conley, CEO, Academy of Life Planning, and former Head of Investments, HSBC

   ‘This is not just another book about investing. It is a comprehensive financial lifestyle manual relevant to people of all ages and walks of life.’
   ​​Mark Northway, Director, ShareSoc

   ‘I welcome this much-needed book, here to help anyone make sense of their money and pensions. With their human touch, no-nonsense language and a relentlessly practical approach, Robin and Jonathan have written the “missing manual” for everyday investors.’
   Jackie Leiper, Managing Director, Pensions & Stockbroking at Lloyds Banking Group

    ‘Jonathan and Robin are refreshingly clear about a complex subject, offering a straightforward, evidence-based approach to retirement planning. Great for the everyday investor who wants to cut through the jargon and make good decisions for the future.’
   Diane Maxwell, former Retirement Commissioner for New Zealand

   ‘Anyone who wants to get started in the world of investing faces information overload. It’s easy to take the wrong advice on social media or to be completely put off investing by reading content that is riddled with jargon. This book offers a great solution – it’s written by experienced authors that you can trust and it’s set out in a clear and highly digestible format.’
   Moira O’Neill, Investing columnist, Financial Times

   ‘The book distils decades of expert evidence into actionable points every investor can follow’
   Jens Hagendorff, Professor of Finance, King’s College London

   ‘This book is an antidote to the misleading messaging and hype that some parts of the industry have been putting out for decades, to consumers’ detriment.’
   Andy Agathangelou, Founder, Transparency Task Force

   ‘This is an important book that breaks down the barriers to financial planning, easily readable by non-experts and based around six sensible rules for investing.’
   Professor Ian Tonks, University of Bristol      

   ‘This is a must read for anyone wishing to make the most of their money and not give away too much to the people and firms that would manage it for them.’
   Ali Hussain, Chief Money Reporter, Times and Sunday Times

   ‘There are many books about how to get rich fast. Their authors certainly get rich, readers less so. Much more useful and a lot rarer are books that help you to grow your money steadily and avoid losing your savings – this book achieves this. It is very precious!’
   Ludovic Phalippou, Professor of Financial Economics, University of Oxford Saïd Business School

   ‘The book is grounded in robust evidence from a wide range of sources, and benefits hugely from the vast experience of two authors who have been at the forefront of the debate on how to democratize savings and allow individuals to be in control of their financial futures. I only wish the book had been written 20 years ago as it would have saved me from many costly lessons.’
   Professor Iain Clacher, Professor of Pensions and Finance, University of Leeds

    

   

    

    

   GOOD FINANCIAL ADVICE IS HIGHLY VALUABLE

   Although How to Fund the Life You Want empowers people, if they so choose, to start managing their finances on their own, the authors strongly recommend seeking good financial advice.

   Wherever you are in the world, The Evidence-Based Investor will try to put you in contact with an adviser in your area whom we know personally, who shares our evidence-based investment philosophy and who we feel is best able to help you. If we don’t know of anyone suitable we will tell you.

   We’re charging advisers a small fee for each successful referral, which will help to fund future content.

   Click here and let’s get started.

    

   © The Evidence-Based Investor MMXXII

    

    

3. A landmark day for British fund management

   October 15, 2019 3:40 pm Comments Off on A landmark day for British fund management

    

   Make no mistake, this is a landmark day in the history of British fund management.

   Yes, there’ve been City “stars” who have fizzled out over the years. But surely none has crashed to earth in quite such dramatic fashion as Neil Russell Woodford CBE.

   Woodford, it was announced this morning, has been fired from his flagship fund, Woodford Equity Income, which was gated in June after years of dismal performance, and the fund is to be shut down. The fund’s assets are to be liquidated, but according to the FCA, investors will have to wait until January to get their money back. Suffice it to say, it will be substantially less money then they originally invested.

   Adrian Lowcock, head of personal investing at Willis Owen, summed it up when he told the Financial Times: “We have seen the complete demise of the most famous fund manager the UK has seen for years… This collapse is on a par with the implosion of New Star at the height of the financial crisis, and it will shake the funds industry to its core.”

   It is indeed a rude awakening — including for Mr Lowcock, who in previous roles at Architas and Hargreaves Lansdown was one of Woodford Equity Income’s most outspoken advocates.

    

   

   The Woodford Funds website after the announcement

    

   I spent the morning looking at what was written about Woodford and the Equity Income fund at the time of the fund’s launch in June 2014 and in the months that followed. What is so extraordinary is not just how much coverage there was, but the fact that it was almost universally positive. There were frequent references to “the Oracle of Oxford” and Britain’s answer to Warren Buffett”.  Even the BBC described him as “the man who can’t stop making money”.

   What’s also very noticeable is how much of the coverage emanated from Hargreaves Lansdown.

   Interestingly, many of the articles published on the platform’s website around that time have since been removed, but many remain. In one, the company’s founder Peter Hargreaves calls Woodford “one of the most gifted fund managers I have ever met”. Other HL commentators lauded his ability to “get the big calls right” and to “shelter money from the worst of market falls”.

   Mark Dampier, Hargreaves Lansdown’s head of research, was quoted again and again in both the trade and mainstream press. One distinguished newspaper even gave him his own weekly column.

    

   

   Media coverage of the launch of the Woodford Equity Income fund

    

   Yes, there were a few dissenting voices. I regularly wrote on The Evidence-Based Investor about the folly of joining the stampede into Woodford’s funds. Indeed, a Financial Times journalist later contacted me to say thank you for persuading him and his partner to take their money out before it all went pear-shaped.

   But those of us who did express concern — Paul Lewis from BBC’s Money Box was another one — were drowned out by Woodford enthusiasts. Responding to my suggestion that the academic evidence concludes, overwhelmingly, that winning funds are all but impossible to spot in advance, a well-known adviser wrote an extraordinary article in The Scotsman headlined Academics know nothing about investing.

   I don’t mean to sound smug or clever. I had no reason to believe that Woodford would perform quite as badly as he did. I was just pointing out that the odds were heavily stacked against him beating the market on a cost- and risk-adjusted basis over any meaningful period of time.

   In the event, Woodford wasn’t just beaten by the market; he was absolutely trounced by it. Apart from the worry that his investors have had to endure, and will continue to do so, they are substantially worse off today than if they had simply ignored the hype and invested in a low-cost index tracker.

   But we are where we are. What, then, does all this mean for regulators, asset managers and investors today?

    

   Regulators

   The Financial Conduct Authority has ignored so many wake-up calls over the years that we shouldn’t be surprised if, yet again, it hits the snooze button and burrows under the duvet.

   But it surely has to take notice this time. Fundamentally, the regulator needs a shift of emphasis — away from industry oversight and towards consumer protection. It particularly has to look more closely at the whole fund ratings sector, which continues to grow (even the raters are rated now!) despite all the evidence that it adds little value for the end consumer.

   There is nothing wrong with platforms and brokers like Hargreaves Lansdown producing recommended fund lists. But if they do, they should be much more transparent about their selection process and they should also be held accountable. They cannot continue to deny that what they’re offering is advice when that’s precisely how most consumers perceive it.

   The FCA also needs to address the lack of genuinely impartial information about asset management available to investors, advisers and trustees of pension funds and charitable trusts. Given the eye-watering profit margins in the fund management industry — around 36% according to the market study the regulator published two years ago — there’s a strong case for a modest tax on those profits to fund educational initiatives.

   Finally, Neil Woodford’s demise raises important questions about liquidity. What we’re increasingly seeing is a mismatch between the liquidity of the investment portfolio and the liquidity offered by the fund wrapper. That’s dangerous.

   The bottom line is that there’s more demand for open-ended UCITS than there is for close-end vehicles like investment trusts. It’s therefore easier for a fund manager to distribute and grow a UCITS fund. With the growth of passive investing, active managers are desperate to prove their value. Woodford clearly tried to circumvent the rules by shoe-horning illiquid assets into a liquid fund.

    

   Asset managers

   Active fund managers are in an enviable but also rather awkward position. They are paid — usually very handsomely — for a service that, in aggregate, subtracts value for consumers. That’s not an opinion; it’s simple arithmetic.

   I very much hope that one of the outcomes of the Woodford affair is a little self-reflection on the part of the fund industry. Famously, the former chief executive of the Investment Association, Daniel Godfrey, encouraged asset managers to put the interests of the consumer ahead of their own, and lost his job for doing so. But it’s time the conversation was revived.

   It’s perfectly natural for companies to want to make a decent profit, but it has to be in return for adding value. Right now, I’m struggling to see where the value is at all.

   Active management has been found out. The genie is out of the bottle, and it won’t be going in again. If they don’t adapt, active managers simply won’t survive.

   To his credit, Neil Woodford is a genuine active manager, and there is a place for real active managers acting on their convictions. But we need a much smaller fund industry, with more boutique providers, operating in areas where indexing has yet to take hold.

   Most importantly, fund managers have to reduce the cost. Instead of complaining that passive is growing too big, they need to provide a genuine choice. It’s simply unsustainable to carry on selling a product when consumers can buy an alternative that will almost certainly deliver better results at a tenth of the price.

   Yes, there will be hard decisions to take. It’ll mean smaller salaries and, for some firms, having head offices in provincial cities rather than Mayfair or the City. But, as a US general once said, “if you don’t like change, you will like irrelevance even less.”

    

   Investors

   There are several lessons investors can learn from the Woodford saga. The first is that investing in heavily marketed, actively managed funds can go badly wrong. In fact, it very rarely goes right.

   The data from academia and organisations like Morningstar and S&P Dow Jones Indices is unequivocal: over the long term, only around 1% of active managers outperform their respective benchmarks, on a risk- and cost-adjusted basis. That’s even slightly fewer than you’d expect from random chance.

   What’s more, those very few managers who will outperform in the future are almost impossible to identify in advance.

   It’s true that Neil Woodford did well at Invesco Perpetual, but out of all the funds you could have chosen over the last 25 years you’d expect at least one to have outperformed. The wonder is there weren’t more of them.

   Was Woodford skilful? Was he lucky? Or a bit of both? We just don’t know. Wherever the truth lies, the odds of him reproducing that performance at Woodford Funds were always going to be slim.

   What we’ve seen with Woodford is classic herding behaviour and overconfidence. The media loved him, and brokers and advisers talked about him as if investing in his funds were a one-way bet. In doing so, they raised expectations that he was highly unlikely to live up to.

   Could the same thing happen to another manager? Of course it could. We’ve seen plenty of suggestions in the media about other active funds that, assuming they’re able to get their money out of Woodford Equity Income, investors should turn to next.

   But the commentators who are touting these alternatives are completely missing the point. Yes, you could be buying the winning ticket, but the overwhelming likelihood is that you’re not, and if things turn sour as they did with Woodford, it could end up costing you a fortune.

   One of the managers that pundits are suggesting Woodford investors should now entrust their money to is Terry Smith from Fundsmith. But it’s precisely managers like Smith, who’ve been on a winning streak, who are statistically more likely to go on a losing one.

   In fact, Smith himself has gone on record as saying that investors should mostly be avoiding active management and using index funds instead. Warren Buffett has consistently said the same thing.

   Ultimately, the most important takeaway is that you buy an actively managed fund at your own risk. Doubtless many took comfort from the fact that Woodford is (or at least was) the most popular fund manager in Britain. But when things go wrong, you’re on your own.

   There are few industries where that time-honoured warning “buyer beware” is more appropriate than it is in active fund management.

    

4. Do fund managers who outperform possess genuine skill?

   September 17, 2018 5:08 pm Comments Off on Do fund managers who outperform possess genuine skill?

    

   One of the biggest problems facing journalists like me who write about fund managers is that distinguishing between luck from skill is extremely difficult.

   Some journalists write about active managers who happen to have produced a few years of decent returns as if their skill is self-evident. The brutal truth is, however, that most of the outperformance you’ll read about in the media has no statistical significance whatsoever. Over the very long term, no more funds outperform the market on a risk- and cost-adjusted basis than you would expect from random chance.

   There are journalists on the other hand, the BBC’s Paul Lewis among them, who argue that all outperformance is purely down to luck. Although I very much share Paul’s scepticism about the value of active management generally, I wouldn’t go as far as denying the existence of skill altogether.

   There have been several academic studies in the US — notably by Michael Jensen in 1968, Burton Malkiel in 1995 and by Barras, Scaillet and Wermers in 2010 — which have all found that outperformance is more likely to be due to luck than skill.

   The best-known UK study, New Evidence on Mutual Fund Performance by David Blake, Tristan Caulfield and Christos Ioannidis, last updated in 2014, concluded that while a few “star” managers do exist, “they extract the whole of this superior performance for themselves via their fees, leaving nothing for investors”. It also found that, ex ante, winning funds are “incredibly hard to identify”. Furthermore, the researchers found, the “vast majority” of fund managers they looked at “were not simply unlucky”, but were “genuinely unskilled”.

   Now a new study by two US academics, Charles Lee and Christina Zhu, has shed fresh light on this important subject. Lee and Zhu specifically analysed trades made by active managers around company earnings announcements.

   It is a well-known investment anomaly that in the event of a surprising announcement — in other words, if a company announces significantly higher or lower earnings than the market had expected — it can take several weeks or even months for that new information to be fully reflected in the share price. The phenomenon is referred to by financial economists as post-earnings-announcement drift (or PEAD) and it offers active managers who are either able to predict surprising announcements or act on them fast enough an opportunity to profit.

   So what was the outcome of Lee and Zhu’s research? Well, first they noticed a marked significant increase in the volume of trading by active mutual funds on the day of an announcement. More importantly, their findings showed that active managers do demonstrate skill in their ability to anticipate and act on announcements and do contribute to the price discovery process, thereby helping to keep markets efficient.

   There is, however, a caveat. Lee and Zhu also found that on days when there wasn’t an earnings announcement, the trades that active managers made were not profitable. Interestingly, the researchers also observed that the PEAD effect has declined over time and that, in recent years, it’s only in the small-cap sector that active managers have been able to take advantage of it.

   So what conclusions can we draw? First, if Lee and Zhu are correct, managers do exhibit some skill in anticipating and acting on earnings announcements, but that is offset by their inability to trade profitably on days when there isn’t an announcement. Furthermore, the decline in the PEAD effect appears to show that markets are becoming more efficient, making it even harder for active managers to beat the index.

   The key point once again is that performance before costs is irrelevant; if managers can’t generate alpha net of fees and charges, they’re subtracting value from the investment process.

   To quote the investment author Larry Swedroe, “having skill is only a necessary condition to generate alpha. The sufficient condition is having sufficient skill to overcome all costs. The evidence is clear that, on a net basis, active management remains a loser’s game.”

   The existence of skill is one thing; skill that is identifiable, and worth paying for, is quite another.

    

   EVIDENCE-BASED INVESTING FOR TRUSTEES

   Are you the trustee of a UK pension fund or charitable trust? If you are, you may be interested to know that, in conjunction with RockWealth LLP, I’m running two breakfast seminars in the next few weeks on evidence-based investing from an institutional point of view.

   Among the questions we’ll be asking are the following:

   What does the academic evidence tell us about the efficacy of investment consultancy?

   Can consultants really identify outperforming funds in advance?

   Do the costs of using consultants outweigh any benefits they provide?

   Why are trustees so keen on high-fee investments such as hedge funds which have provided such disappointing returns? And

   For an institutional investor, what does an evidence-based investment strategy look like?

   The first seminar is in Cheltenham on Wednesday 3rd October, and the second in London on Wednesday 17th October. Among the other speakers will be Charles Payne, formerly Investment Director at Fidelity, and the hedge fund manager turned indexing advocate Lars Kroijer.

   Trustees of pension and investment funds of all kinds are welcome to come, and attendance is free. If you’d like to attend, simply email Sarah Horrocks at RockWealth at sarah@rock-wealth.co.uk.