This is an important question that is asked by many people before they begin investing in shares. It’s also one that people ignore at their peril.
The rapid decline in RBS share price destroyed the value of many investors savings
In the 2008 banking crisis, when banking shares fell by unprecedented amounts (Royal Bank of Scotland down -94%, Lloyds down -90%), many pensioners lost their life savings. They had invested most of their money in a select few banking shares, and were relying upon the dividends they received to supplement their state pension and get by.
To the news media, this was a highlighted as a the grave consequence of the greedy and risk-taking behaviour of investment bankers. Indeed, it was.
However, as bold as it may seem, their losses were the predictable result of the ignorant, fool-hardy and outright dangerous investing strategies engaged in by these investors. A sophisticated investor with an appropriate investment strategy would have lost less than 30% on their entire portfolio during this period (and would have recouped all of this loss by 2010). The crash caused people to wonder whether shares are a good investment afterall. The answer is they remain a sensible investment, if done properly.
This makes a clear case for the need for individual (or ‘retail’) investors to seek professional investment advice from an independent financial advisor (IFA).
You Need a Financial Advisor If…
1. You are investing a significant amount.
‘Significant’ cannot be truly defined by a number, significance varies person to person. Although it’s safe to say that an investment is significant if you would be extremely upset/angry upon learning that your investments have all but disappeared.
2. You aren’t a ‘sophisticated investor’.
A sophisticated investor is generally regarding as someone who either works as a finance professional, an experienced investor of many years, has achieved a financial qualification in a relevant area, holds at the very least, a bachelors degree in finance.
3. You will be depending upon the income from your investments to fund your lifestyle or retirement.
Are these investments just a ‘punt’ that you hope to make a small profit on, or are they an integral part of your finances? If you look at the investments as a form of pension or ‘rainy day’ savings then you certainly depend upon the investments.
The Dangerous Risks That Normal People Take
The financial crisis has pointed out that many people in the british public were taking financial risks that were far greater than they expected. While they may blame the banks for their losses, in reality they must blame themselves for exposing themselves to that risk. Companies will always fail, and as the past 10 years have shown us (and the 10 before that), this maxim includes the big ones.
Imagine that you have lived in a society that exists without the stock market or risky investments, and you have been brought into this modern world and you are being informed of the following scenario:
You are about to play a game.
- In this game you are required to make a few decisions that will either improve your quality of life, have no effect, or cause you to be unable to continue your life in comfort.
- Most of the players in this game have been playing for 10 years or more, and not only have great experience in the game, but also have an informational advantage.
- The expected result of this game is however, positive.
You are presented with three choices:
A) You can either play on your own and receive all of the benefits but risk losing the ability to maintain your current lifestyle.
B) You can invest time & money in educating yourself to increase your chances of winning/ decrease chances of losing.
C) You can pay a professional advisor to aid you, which will slightly reduce the benefits of winning, but will minimise or practically eliminate the chances of losing great amounts.
Looking at the three options, there seem to be two clear winners: you would either choose to education yourself properly or seek professional help. When you view investing as a simplified game like the above, it seems almost crazy that anyone would jump straight in and make investments without using option (B) or (C). Why would you take the risk of losing everything when the cost of the alternatives (B) & (C) are relatively cheap?
But yet, against this common sense, many individuals still put large portions of their wealth in a smaller number of shares, often for reasons that are more sentimental and rhetorical rather than supported by good financial argument. Ironically many of these individuals will actually be very risk averse in other areas of their lives.
The Pitfalls Un-Advised Investors Fall Into
I have written a detailed article on the 10 shocking common mistakes that inexperienced investors make here. Be sure to check it out!
I hope the 3-point list above helps you decide whether you need a financial advisor or not. If you meet the three criteria and do not even run through your investment plans with an IFA, do so in the knowledge that you are penalising your chances of receiving the best returns. Understand that other investors out there will be taking the same risks as you, but with greater rewards. Finally, appreciate that if you wake up and the value of your portfolio has fallen in half – the only person you can really hold to account is yourself!
If you are considering making large investments and have decided to seek out a financial advisor, then you want to see a ‘Fee-Only’ advisor. These advisors make no commissions from products they sell, and therefore work in your best interests. These advisors are different from the similarly named ‘Fee-Based’ advisors and the traditional ‘Commission’ advisors.
If you’re interested in advising as a career, find out ‘How to become a financial advisor‘.