Clients using financial advisers in the UK increase investment returns by over 25% more a year on average than their DIY counterparts, a survey by investment management company Legg Mason found.
The study of over 1,000 investors revealed that in 2018 advised clients achieved returns of nearly 7.5%, compared to the 5.9% that do-it-yourself investors got.
According to the firm, the 27% difference between the two cohorts can be attributed to the different investment allocations over the course of 12 months.
Legg Mason also found that DIY investors tend to be more cautious with their finances, as 46.8% had half of their savings in cash, while only 29.7% of advised clients did the same.
As a result, those who turned to financial advisers had four times more the amount they held in cash invested in alternative vehicles. Overall, they had 12.6% of such assets in their portfolios compared to only 3% of their DIY counterparts.
Disparity is in cash
However, Moira O’Neill, head of personal finance at online platform Interactive Investors, criticised the study as she told International Adviser: “Any research that focusses on just one year of performance data will inevitably raise an eyebrow.
“What is striking about this research is the much lower levels of cash in advised client accounts (30%, compared to 47% for DIY investors), and this is likely to account for most, if not all, of the disparity – ‘cash drag’ has clearly played a role.
“However, this is not something we see reflected amongst our own, highly engaged, customer base, where we see much lower levels of cash holdings. For ISAs, the average cash figure is 13%, and for the average SIPP account, the cash balance is 21%.”
Balancing effort and cost
O’Neill added: “It all comes down to the level of effort you put in and how you reduce your costs. But the two should be complementary.
“At some point in your investment journey you are likely to benefit from some level of financial advice, whether that’s delivered through technology or face to face. Likewise, advisers should learn to work with investors who want to manage at least some of their investments themselves.
“Many investors who manage their own investments know that costs are certain, and returns are uncertain. Given that costs can add up to tens of thousands of pounds over the long term, the most successful investors will always have an eye on costs.”
However, David Healy, director at wealth management company Kingswood, told IA: “The cornerstone to any investment portfolio is asset allocation, which drives the risk rated returns and ensures adequate and suitable risk controls.
“Individual investors tend to select funds or managers that have a higher profile, as well as markets they are familiar with and understand without necessarily knowing the full breath of opportunities available, the current drivers in the market place, and the type of fund, collectives and passives that one can utilise.
“As evidence shows, investors are often reluctant to invest cash, while professional advisers are looking at the longer term objectives of the client and can show the merit of time in the market, of regular investment, total return and further deployment of cash surpluses as they arise. Regular monitoring, optimisation and review is also key to ensure the portfolio maintains its objectives over time and rebalancing will maintain the risk parameters.
“Professional investors are dealing with this on a daily basis, while a DIY investor usually has other commitments to balance in with the running of their portfolio.”
Robo-advice is struggling
As O’Neill pleaded the case for people who decide to turn to DIY investing, asset management firm Investec has been forced to shut down its robo-advice business.
The company revealed in its annual results that it was closing down ‘Click and Invest’as it has experienced losses in the last two years.
At the end of the 2017-18 financial year, Investec reported a £13.5m ($17.2m, €15.4m) dip from its robo-advice service, compared to the slightly lower £12.8m in the 2018-19 financial year.
It has also taken a write-down of £6m on the capitalised value of the software, totalling to £32m in losses.
“The reality has been that the appetite for investment services such as ours remains low and the market itself is growing at a much slower rate than expected,” Investec said.
DIY cannot beat expertise
Richard Hughes, deputy chief executive of Brooks Macdonald International told IA: “We fundamentally believe that investors (mass affluent-HNW and UHNW) should obtain professional advice from qualified and regulated financial advice and wealth management practitioners.
“We further believe that active investment management employing a well-diversified cost-conscious approach delivered by experts give investors the best chance of achieving their objectives.
“So-called ‘DIY investing’ has a place but only as part of an overall well-structured and long-term strategic plan, which we think is best constructed by professionals who can guide investors.”