Everyone has made decisions they have come to regret later in life – we all make mistakes. Human nature teaches us to look for reasons which created an undesired result and to look for ways to avoid the same outcome in the future. Our brain is the most powerful computer known to mankind, processing vast quantities of information in seconds instinctively and without much effort. Unfortunately, some decisions have a more profound effect on our lives than others, particularly financial ones.

From the moment we’re born, our journey through life determines who we become. Our first benchmark is generally defined by our parents and in many cases considered the ideal recipe  for living one’s own life. However, most of us look beyond those boundaries by considering other ways to coexist in a fast changing world and to do things a little better than our parents did. But what we value most in life is carried with us from childhood; it may be that our parents struggled financially so our desire to earn money becomes paramount. Conversely, I can think of one example where a friend became completely disillusioned by corporate life and swapped it for charity work in order to spend more time at home. Our decisions are crafted by our personal experiences, how we feel and what we think will make us happier in the future. The most subtle but profound changes in our lives are sculpted unconsciously by what we see and hear on a daily basis. Our survival instincts as human beings naturally lead us to depend on others and to expect they have our best interests at heart. Our level of dependency on others will change as we become more adept at making decisions ourselves from personal experience or unfortunately, disappointment in others we trusted. More often, we learn the greatest lessons when things go wrong.

Every day we make financial decisions based upon what we see and hear on the television to what we read in the press. Our brain is automatically trained to define parameters, to try and rationalise situations regardless of their complexity and to seek answers. The brain’s natural response is to process vast amounts of information in order to assemble cause, reasons, alternatives, problems and solutions but it rarely accepts the unknown. It is therefore natural to seek answers from others in the hope they can fill the void created by the unknown. Typically, independent financial advisers are considered an obvious choice to provide guidance on financial matters like investment, pensions and inheritance tax planning. Granted, the financial world can be complex and boring which is why many people defer these decisions to an “expert”. One of the main reasons things go wrong financially for the general public is over-reliance on expert opinion. Money is a very emotive subject and often used as leverage by advisers to sell financial products. Investor greed also plays its part because we have an instinctual desire to seek the best results, sometimes forcing our brain to become ‘over-positive’. Like most people you’ve probably heard that little voice in your head saying “I should have known better”. This situation plays out every day in homes, offices; by intellectuals, executives and ordinary people because they want to believe the dream. I call this the “Niagara Syndrome” because people go with the flow too easily and get caught-up in the current, eventually hearing the deafening roar of a problem downstream. Unfortunately, many people are unable to recover from turbulent financial times and either change their retirement plans or worse, they sink.

The human brain’s unwillingness to accept the unknown is what drives bad decision making. This is not to say there are no other ways of making better financial decisions, indeed there are but it is essential we recognise our own shortcomings first. There are a variety of reasons why our brain chooses to ignore reality and fails to recognise human fallibility; call it pride, arrogance or putting too much store in what we are told, they all lead to the same result. The most successful investors approach financial decisions from an entirely different perspective based on simple logic and process. They accept financial advice from others only if they satisfy key criteria. This may seem straightforward and it is, provided you know what questions to ask. Establishing solid financial foundations can only be achieved by asking the right questions at the beginning before a penny is exchanged. This approach requires a steely determination to accept nothing less than perfect. You must ignore impressive offices, the well groomed salesperson who talks with verve and confidence or indeed the promise of great returns. You are looking for facts, evidence and knowledge that support three key questions and none of them involve razzmatazz or promises. I will discuss what questions you should ask later but first you must be patient and think about your own personal character, the manner in which you currently make decisions and the psychology behind them. Whether you procrastinate or dive straight in, both may be detrimental to the outcome if you don’t ask the right questions.

Think about your current financial adviser, what do they look like and what do you expect from them? Like most people you will envisage a well dressed man (usually not a woman) who can solve your financial needs whilst making a good return on your investments. Alternatively, picture in your mind building a brick wall: does the wall stand tall and straight with meticulously pointed brickwork? These images are created solely by your brain, a manifestation of your ideal outcome which generally ignores the practicalities. I have used these two examples for a very good reason; a badly built wall can be knocked down and re-built whilst bad financial decisions can stay with you for an eternity. Many people approach financial planning as they would to building a brick wall, they each require a different mindset and approach. If you’re serious about securing a comfortable retirement and passing your acquired wealth to something or someone else, improve the quality of your financial decisions.

Having a good rapport with your financial adviser is important but trust is something you need to build over time, not from the beginning. Typically, from the first meeting a financial adviser will endeavour to establish trust and credibility with you which are used to influence your financial decision in order to acquire a sale. On the other hand, you seek wisdom from the financial adviser in the hope they can solve a financial problem. Eventually, both parties will find common ground but this method of financial decision making is flawed because it is relationship based. As cold and logical as it sounds, financial decisions should only be considered after the adviser has been thoroughly interviewed. Your thoughts should not be dominated by rapport or trying to establish trust or common ground because they hold little value. The interview process consists of the same three questions for any so-called financial ‘expert’ you meet and your task is obtaining documentary evidence to support their claims. This logical process prevents your brain getting ahead (excuse the pun) of itself and separates how you feel about them from what they’re saying. This simple but effective approach puts the building blocks in place to develop a professional relationship you can eventually trust and consequently the advice supplied.

Let’s get down to the questions you need to ask and the importance of how they relate to each other. You will undoubtedly come across very few situations where satisfactory answers to all three questions can be achieved but I urge you to be persistent. The questions are categorised across three distinct areas, they are; Cost, Qualifications and the most important area, Process. These areas span how you pay for advice, the quality of advice and the manner in which your investments are handled. They are a chain which is linked between you and your future objectives, if one link is weak and breaks, greater strain will be placed on the others to perform. It is therefore important to make sure you undertake proper due-diligence of each area to ensure your future objectives are given every chance to succeed. To put matters in perspective, these questions are akin to building solid foundations that support three load bearing walls of your dream home. Care taken at this stage reduces time and effort making minor adjustments in the building process and provides greater clarity of the outcome. Fortunately, it requires little effort for the right financial advisers to demonstrate their expertise, or lack of it, as the case may be. It’s simply a matter of asking the same questions systematically and obtaining evidence to support them. Obviously, you need to have an understanding of the basic questions you should ask, what you should obtain and why. Our next section is therefore dedicated to explaining these issues and you will be amazed how logical and straightforward it is to put into action.

1. Cost

The questions you should ask in relation to cost include; how do you charge for financial advice; commission, fees or combination of both? Also, what charges are applied to our investments every year? Also, do we pay any additional fees to you or anyone else at any time in the future? ALWAYS OBTAIN WRITTEN CONFIRMATION!

Before we consider what evidence should be obtained let us first examine the impact that charges have on investments. There’s a lot of supporting evidence that suggest average investment charges are 3% per year and in some cases even higher. Let’s consider this in two ways, both in terms of the growth lost to charges and the risk applied to your investment. Clearly, if investment growth is 9% per year and 3% is taken in charges simply means over 30% of growth is lost in charges. The situation is much worse if one assumes more modest growth rates of 6%, meaning 50% of growth is lost in charges. My strong suggestion is to cap charges at 2% because, just like squeezing juice from a lemon, the stock market can only provide a limited growth and much depends on the risk taken. You must get the concept square in your mind that risk and return are directly proportional. In other words, one can’t expect huge growth in the absence of risk; high returns always carry high risk in the long-run. That brings us neatly to our second issue, the impact which charges have on risk. In order to offset the impact of average charges, fund managers often chase additional growth which consequently attracts additional risk. It is not uncommon to find the managers of investment funds taking this position when they want to appear at the top of the league tables. After all, they are assigned the task of buying and selling investments as they see fit and often change the manner or type of investments they manage as a consequence.

Think of charges like the layers of an onion; what you pay initially to your adviser, their annual charges and other charges to third parties connected with your investment. Quite often, the charges associated with third parties are not fully accounted for and in some cases not disclosed. What you are looking for is a comprehensive schedule of total on-the road charges as they apply to the investment being made. However, before you get to this stage your adviser may charge fees or commission or both. My suggestion is to pay fees for advice alone; this method breaks the link between cost and the amount invested. It makes no sense to pay massive costs if you are investing large sums of money when it takes around the same time making a small investment. Many financial advisers charge commission simply because it’s more profitable. If you pay a fee for professional advice it should be abstracted from the amount you invest allowing a greater proportion of your money to be invested. In summary, I suggest you avoid financial advisers who charge commission, period.

2. Qualifications

Qualifications are the obvious benchmark by which knowledge can be measured. There is however a conundrum present and you should remain sceptical about the person delivering advice regardless of the level to which they are qualified. That’s not to say qualifications are worthless, on the contrary but it’s certainly not the panacea answer which determines expertise. Firstly, advisers wishing to remain in the industry have no option but to achieve a benchmark standard by taking certain exams. They are given no choice in the matter, so you may find some advisers who have dragged themselves over the exam hurdles with no underlying interest in the subject matter. Indeed, there is no limit to how many times they sit and fail relevant exams before they scrape through and move to the next one. Eventually these advisers attain qualifications necessary for them to trade but have little interest going beyond this level or re-sitting previous exams to remain fresh, they don’t have to. Obviously, it is very difficult to identify those advisers who have a genuine passion from those without so further questioning may be necessary. You should investigate the adviser’s opinions and views on qualifications and to understand their passion about providing advice to their clients. It will be easy to detect whether they hold a genuine admiration for their career and consequently their clients by simply listening to them.

It would also be prudent to obtain copies of all qualifications, certificates and awards they hold if only to reinforce that you remain cautious about them. This may seem a fruitless exercise but it establishes a business-like bond rather than one based on friendship. They should actively pursue and demonstrate a commitment to their career by attaining further exams in specialist fields relevant to your needs. Remember, it may be many years before you know whether the recommendations made to you have worked so quality knowledge from the start is essential. More to the point, your adviser may retire before you do, move jobs or leave the industry but the decisions made for you may last beyond your lifetime. You will greatly increase your chances of success if you know that you are dealing with a highly committed and well qualified individual from the start. In summary, look beyond standard qualifications; consider the character and integrity of the person dispensing advice.

3. Process

Assuming you’ve found a well qualified fee based financial adviser, you need to determine how your investment affairs will be managed in practice. Effectively, this is where the rubber meets the road and you should have a clear idea of what services and information will be supplied to you in the future. Sounds simple enough but most financial advisers don’t come close to providing adequate reporting to ensure you remain on-track. The usual offering consists of an annual meeting and valuation report peppered with numbers and obscure information but generally provides nothing useful to the average investor. The point here is that you will gradually begin to feel the effects of “Niagara Syndrome” by not knowing exactly where you stand financially. Even more disturbing is that your financial adviser is in the same boat oblivious to issues that may push your plans off-course. What happens if you decide to fire your financial adviser, they retire or die? These are the most important issues to address before your financial journey begins. Your investment strategy needs to be robust enough to allow your financial adviser to disengage from your plans without disturbing your objectives. However, before you begin to fret about how this can be achieved let me assure you a method does exist and is a relatively straightforward matter to attain.

You will need two documents for your financial journey; one which sets out how, why and when your investment affairs are managed and one to confirm the ongoing position. Thankfully, both contain very specific information which is relevant to every investor and financial professional around the globe. The first document is called “Investment Policy Statement” issued at the start; the second is an “Investment Review” which should be issued either quarterly, bi-annually or annually to suit your circumstances. These documents form the core process which allows you to know where you stand and will enable the financial adviser to make necessary changes when needed. The information contained in these documents is ‘boiler plate’ meaning they contain very specific issues relevant to all investors and they never change.

The specific information which should be contained in both these documents is something we only share with clients directly in order to protect our professional edge. This information, albeit dry is the engine which drives a financial strategy forward through clear undiluted reality to where you want to be. However, before you get too far ahead of yourself let’s take some time to consider why these documents are so important.

The Investment Policy Statement or IPS as it is commonly referred is the foundation upon which all investment decisions are made. It differs from a financial planning report in that it focuses on key decisions rather than financial concepts used to plan objectives. This subtle but profound distinction is similar to the difference between a detailed specification for a house-building project and preliminary architectural design sketches. In other words, the IPS is used to provide a narrative upon which the financial strategy is based, thus turning a concept into defined structure. Conversely, the financial planning report is the concept or idea which breaths life into the IPS. Unfortunately, many financial advisers deliver a concept to their clients in the form a financial planning report but fail to provide an IPS and thus, no solid financial structure or process by which to manage investment decisions.

Investment Reviews are an extension of the IPS and designed to confirm the ongoing position of your investment strategy as it unfolds. They should be issued periodically to suit the nature and circumstances of the financial plan and also embrace the client’s personal requirements. For example, we would recommend quarterly reporting for sophisticated pension strategies like ‘Drawdown’ but this frequency can apply to basic strategies where clients simply want piece of mind at regular intervals. In other words, every client scenario should be assessed individually on its merits. I have mentioned previously that information contained in the investment review is ‘boiler plate’ meaning it never changes. Your review should always consider charges, performance, valuation, asset allocation, risk and key information which provide a birds-eye view of your financial situation. You may think these are obvious factors that should be illustrated in every investment review and my reply would be “compared to what?” In my twenty years as a professional adviser I have seen very few investment reviews that explore every facet beneath the veneer of what constitutes an investment portfolio. More importantly, both the investor and adviser fail to recognise how the investment portfolio truly compares with what is actually happening in the global or domestic investment market. The main focus of performance in the eyes of most investors is the growth or fall of funds under management. Let’s assume your investment portfolio has grown by 8 per cent over the last twelve months and you are overjoyed with the recommendations provided by your financial adviser. How would you feel about them a day later knowing similar investments had grown 15 per cent? It is therefore crucial to understand benchmark performance relative to your investments under management. Other important factors include disclosure of ALL charges and accurate measurement of risk rather than describing it as cautious, medium or high (compared to what?).


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