EDINBURGH — Choose an investment style that works for you, is the message from Dawn Ridler, a Johannesburg-based independent financial adviser. She outlines three main investment styes: abdicate, delegate or micromanage. If you’re like me, you’ve probably tried a bit of everything. At times I’ve left decisions to others, with my worst outcomes from delegating to intermediaries and putting my savings pots into life company “savings” products. My best decisions have come from direct investments in property and other assets. – Jackie Cameron
By Dawn Ridler*
Abdicate, Delegate or Micromanage – what is your investment style?
There is a good reason Richard Thaler won the Nobel prize for Economics. The academics have woken up to the fact that the only sane explanation for the messed up financial markets is that humans are driven by something called emotion, and until you understand that, you’ll never understand what makes markets tick. (Personally I found Thayer’s book ‘Misbehaving’ boring and indulgent, but those are key ingredients for an academic best seller. ‘Nudge’ was an easier read, but a single (excellent) concept fluffed out into a full book.)
So, how do you manage your wealth, assuming of course that you’ve managed to consume less than you earn so that there is actually something to invest? If all your disposable income is going into debt servicing then I suggest you need to take a step back and address that first. There is no point in investing at CPI plus 3-5% when the interest you’re paying on credit cards or personal loans is running at CPI plus 11-25%. The only ‘good debit’ out there is at prime, or less (10.25% and below) – like your bond. We can look at your investment style three ways, abdication, delegation and micromanagement.
Investment style 1: Abdication
Abdication is when you let someone else take charge of your investment, this could be a broker or a spouse – either way, it is the worst thing that you can do. You do not need to be a maths or statistics genius to watch your investments, but some guidance from a professional usually helps. It is all very well to trust your spouse to make all the decisions, but unless you are involved in all the financial planning meetings at least once a year, you only have yourself to blame when it comes round to your retirement or a divorce and you find yourself with years of saving to catch up on.
Just because a broker has helped you put an investment in place (especially if it is on an insurance platform – the Liberty/Old Mutual/Sanlam/Momentum/Discovery stable) that is no reason to expect that you’re set and the investment is going to grow until retirement. Unfortunately, at the moment, brokers who sell investments on insurance platforms are perversely incentivised to ‘hit and run’, they get all their commission – for as long as 27 years – on day one, irrespective of whether they ever speak to you again. Anyone who frequently reads my blogs knows that this is one of my pet peeves with the industry, and thankfully it is slowly changing.
Understanding the difference between an insurance investment and a “LISP” investment isn’t always easy – especially since the insurers also have LISP platforms (Momentum Wealth or Sanlam Glacier for example). Just ask your investment broker one question – how are you paid for this? If the answer isn’t “as and when” or “monthly as a percentage of assets under management” then it’s probably an insurance product. Your next question should be “what are the early termination penalties?” Abdication often happens with Group Pension and provident schemes. If you’re given a choice, don’t just pick the one that you see on TV the most – the fees could seriously erode that investment. Ask your financial advisor for his or her opinion or get some of the fund fact sheets yourself. Where possible choose an ‘on-platform’ fund (for example a Momentum fund if it is a Momentum pension/provident fund) the fees are lower and probably fine for a long-term investment.
Investment style 2: Delegation
Delegation is when you partner with an advisor to help you manage the investment on an ongoing basis – and you’ll probably have to pay them for that (even if it indirectly by allowing the platform to pay them.) Just like in the workplace, you should be doing an annual performance appraisal of the investment and the person who is helping you manage that portfolio. What is reasonable to expect from the advisor? Frankly, it is going to depend on how much you have invested with them – over R5m, a monthly report and statement, R1m – R5m quarterly and below R1m probably annually, perhaps with quarterly statements sent by the provider.
In my experience as a financial planner, one of the most effective ways to build up a partnership with an investment client is by steady skills transfer, which is why I write blogs and send out a weekly newsletter. A better-informed investor is a pleasure to help, they have the right expectations of an investment and know when a macroeconomic change is coming that could impact their investment. In other words, they can make an informed choice, and not just have a knee-jerk reaction to a chat around the braai. Clearly not every advisor is going to do what I do, but they can certainly send you links or content from sources out there, and keep in touch so that you know you’re not an investment hit-and-run victim.
Investment style 3: Micromanagement
Micromanagement is another word for DIY. Why pay an advisor when you have all the skills to do it yourself? I agree, sort of. The best way to assess whether you have the skills to do it yourself is first to fess-up to your competence. The Gordon Institute’s four stages of competence relates to the phases we go through when learning a new skill, from being compete unaware that the skill even exists (you don’t know what you don’t know), to being able to practice it unconsciously and competently.
Personally, in a field like investment, I like to keep myself consciously competent because it changes so much and so often that the second you think you know it all, you don’t. If you, like me, love the markets, investments, reading business reports and books, analysing graphs and trends, brushing up on tax and other legislation and have Bloomberg on in the background all day – then managing your portfolio yourself will be a pleasure. If you’re micromanaging to save yourself a couple of bob on asset manager or advisor fees, but can’t be bothered to get yourself consciously competent – your investments will feel the brunt of it and you’ll never get the time back. The ‘secret sauce’ a good investment person will have is how to ‘balance’ your portfolio and align the asset allocation to the objectives.
Action: There is a fine line between abdication and micromanagement of your investments, find the middle ground that suits you best and someone to partner you on the rest.
- Dawn Ridler is an Independent Financial Advisor with extensive experience in both financial advisory and business. Her unusual combination of an MBA, BSc and CFP ® has evolved into an ‘ecological’ and holistic approach to advisory, which she has tagged ‘Wealth Ecology’ in her company, Kerenga.
This article is published here on BizNews.com with the kind permission of Dawn Ridler. Copyright: Dawn Ridler