The IFA of Wall Street

What do IFAs know about investments?

This was the closing remark a local stockbroker made on being informed that a client's portfolio was being transferred to our management.

The short response is, plenty; but a more helpful answer might be to compare what IFAs and stockbrokers (or discretionary fund managers) do for their clients. The two are very different.

First of all, it's worth mentioning perceptions.
It must be admitted that financial advisers have suffered from a poor profile for a long time, which still lingers for some despite great strides being made in recent years.

Stockbrokers on the other hand, tend to be associated with sharp suits, big money and the City. Of course both images are hopelessly inaccurate, but nevertheless, Hollywood films are made about Wall Street, not IFAs. Even my better half would rather I was a stockbroker than an IFA. Apparently, 'It just sounds better'.

So what's the reality?

A good IFA will have an overall view of a client's financial circumstances, enabling them to minimise income and capital taxes; structure estate planning; manage protection, life assurance and ever more complex pension matters.

IFAs will use a range of investment vehicles and oversee the selection of investment managers. In short, an IFA should manage a lifelong and overarching financial plan including, but not limited to, investment returns.

I can say from experience that even for very wealthy clients (the sector we operate in), it's almost unheard of for stockbrokers to get involved in any of these aspects, other than one sole focus: selecting stocks and shares and aiming for superior investment returns.

This isn't in itself a criticism, since generally speaking, stockbrokers aren't claiming to be something they're not. But of course if they're specialists in doing just one thing at the expense of other important planning issues, they should do that one thing exceptionally well. But do they?

Well, it just doesn't make sense to me that the world's best investment managers are to be found in your local stockbroker's office, and our experience reflects that. We shouldn't be surprised by this.
If they were as good as the 'big boys' of the large retail investment funds, they would certainly have been noticed and already be enjoying the rewards.

The truth though, is that usually they're not calling the shots anyway, but just passing on the analysis to their head office.

I'd rather my client's wealth didn't rely just on the local stockbroker, or the wisdom of his or her head office. Instead, I think it makes much more sense to trust a blended range of the very best investment managers in the business.

This tends to be how IFAs work. By delegating stock selection to fund managers and focussing instead on the selection of the managers. And of course IFAs, as explained above, do an awful lot more besides this one aspect of financial planning.

The world has moved on from when the pin-striped private client stockbroker was the only choice for your clients' investments. But when was the last time you reviewed the investments of the trusts and charities in your files?

And returning to where we began, when did you last ask the question: What do stockbrokers know about financial planning?

Scott Gallacher is a director at Rowley Turton

He writes the regular IFA comment in Private Client Adviser