Self-Manage Investments Or Hire A Professional; How Do You Decide?

The biggest single reason people come to us is to discuss investments, either from a newly acquired capital sum (e.g. business/share sale) or an accumulated amount they have saved over many years. We’ve noticed people tend to fall into one of two groups; they’ve either decided to work with a professional and they’re trying to find the right one or they are trying to decide on whether to manage the amount themselves or to delegate this to a professional.

Like almost all areas of life, the boom in online services and availability of free, easily accessible information has changed financial services dramatically over the past few decades. Investing has to a large extent been democratised, whereby anyone with savings can access a multitude of investment options. There are now no shortage of online platforms, best-buy lists and packaged model portfolio solutions to choose from. Choosing between these services is another big question and beyond the scope of this guide.

Meeting these people got us thinking, if we were in that second group, how would we make that decision? How would we know whether to manage investments ourselves or to delegate this to a paid professional? It’s certainly a complicated question with no easy answers. When discussing it, the answer invariably ending up with it depending on the circumstances of the individual.

We did however identify a number of factors which would influence the relevance and attractiveness or professional advice / management:

• Interest

• Time & Energy

• Process / Discipline

• Tax

• Complexity

• Income

• Costs

• Family

In this white paper we run through these various factors and note how, in our opinion, they may impact the relative attractiveness of self-managing investments or seeking professional help.

Obvious I know, but it does help. If you find thinking about and researching investments interesting, then clearly self-managing a portfolio will be more appealing than if you find the subject a chore and something you would rather avoid.

Connected to this, what are your feelings about delegating? Would you view it as losing control or would you gain reassurance and confidence by having professional help?

It is worth noting here a difference between advisory and discretionary services; with advisory services, you can retain a greater degree of control if you wish (you are advised to take certain action, but have the ultimate say).

While most professionals will be happy to work collaboratively with you, there is not much point in hiring them and paying for their services, if you are going to repeatedly second guess or override them. The more control and involvement you want, the more appropriate self-managing your investments will be.

Both at outset and on an ongoing basis. Setting up a portfolio will likely take some time for most people; both in determining the broad strategy and type of investments, as well as the specific accounts/products to be used.

Your investments will also need to be reviewed on a semi-regular basis. Ideally you would assess that the portfolio is on track (behaving as you would expect) and remains appropriate to your needs

Connected to this, if self-managing you might want to consider “rebalancing” the portfolio periodically. Portfolio allocations will naturally drift over time and tend to gradually increase in risk (as higher risk assets have higher expected returns). Model portfolio solutions and multi-asset funds will typically automatically rebalance, if you are using those.

However, don’t mistake activity for good investing. There is a difference between sensibly monitoring and reviewing your investments and chopping and changing investments for the wrong reasons, as discussed in the following section.

Another way of putting this is, are you likely to make or avoid several different big investment mistakes. The world of investing can be quite counter-intuitive and our emotions tend to work against us; a disciplined process can help guard against some expensive mistakes.

Most importantly, all investors need to avoid the “emotional cycle of investing”. Everyone knows the old adage ‘buy low, sell high’ however our hard-wired emotions can make us do the opposite.

As investment markets rise people feel more and more optimistic. They see the returns that are being made by others out there and greed sees them taking on more risk, buying in at higher prices. Then when markets fall, nervousness and fear set in and people panic and sell at lower prices. The cycle then repeats.

Decisions investors make during periods of extreme market volatility can destroy wealth. Usually, it’s a bad idea to be swayed by market movements (read “Andrew’s story” for an example of a near miss)

Connected to this, you need to be able to set an appropriate level of risk – both for your emotional tolerance and financial circumstances - and barring changes in circumstances, stick with it.

Are you going to pick a sensible portfolio/process and stick to it, or pick a collection of things? In particular, are you liable to get sucked into following fads or simply picking past winners?

Past performance doesn’t repeat; a fund or manager that has performed well in the past is no more or less likely to outperform in the future. Often investors chase performance, moving into funds that have just performed well, missing out on those stellar returns and not getting them moving forwards, before jumping onto the next thing that has just performed well. Due to this, the average investor underperforms the funds they invest in

We discuss a few of these issues and how Collingbourne’s investment process is structured in our ‘Six Principles of Investing’ document.

An investor with all their investments in ISAs may have little (possibly nothing) to gain from tax planning. However, for an investor with ISAs, pensions and taxable accounts (or who should be utilising all these) - particularly for a couple with different incomes – there may be significant scope for tax planning.

Would you benefit on advice on which type of account to invest through i.e. how much to save into pensions? If you hold taxable accounts, are you utilising all your tax allowances and reliefs each year and if a couple, allocating assets efficiently between you keeping in mind your other income. Managing high-value pensions, planning contributions and withdrawals, whilst considering both the annual and lifetime allowances can also be a complex and costly to get wrong.

For more information, please see our ‘Handling High-Value Pensions & the Lifetime Allowance’ white paper.

Where taxable investments are held and multiple account types used, a good adviser can maximise the use of various tax allowances and reliefs and help you allocate efficiently between accounts, which can make utilising their services more worthwhile. If this isn’t the case, say everything is held in ISAs, there may be no scope for them to add value in this respect.

This isn’t a particularly easy question to answer in isolation, but there are a few issues to consider. Would you benefit from help with decisions on how much you can afford to spend or give way, when can you afford to retire (or be financially independent of your work) or how much do you need to save to achieve this?

Do you need help with estate planning, ensuring the right assets are passed to the right people at the right time (taking into consideration Inheritance Tax)? Do you have contingency plans in place; what happens in event of your serious ill health or death? Could both you and your wife access enough cash and continue to pay bills, do you need additional protection in place for you and family?

Financial planning services are often bundled together with investment management. The greater the extent you could take advantage of these services, the more attractive engaging with a professional may be. On other hand, if you have relatively straightforward affairs with little need for such help, there is less to be gained in paying for services which include it.

This adds an additional layer of complexity, compared to accumulating capital, including increased tax management issues. How much can you afford to spend? Which accounts do you source income from? How much to draw from pensions?

For more information on pension withdrawals, please see our ‘Business Owner’s Guide to Pension Withdrawal’.

Most investors tend to use the traditional method of simply taking an income yield i.e. dividends from equities and interest from cash/bonds. The problem is an efficient portfolio tends to have a modest yield which can be insufficient to meet spending plans. It doesn’t really make sense to let income yields dictate the amount you spend and give away. Investors also tend to distort portfolios to increase yield, reducing investment efficiency.

The alternative is total return investing, where both income and capital are used to fund portfolio drawings. This allows an optimum level of drawings for your financial plans to be selected, without having to be limited by yield or distort your portfolio. A good professional can assist with this.

There is also “sequencing risk” to consider; the order in which investment returns (which vary over time) occur matters. A big fall in your investments shortly after retirement could dramatically reduce the level of income you could sustainably draw i.e. without risking running out of money. Setting the right level of risk, the right mix of asset classes and the right level of income/drawings can help mitigate this risk.

Another obvious one; the greater the cost of utilising professional help, the less attractive it will be. You need to consider the total cost of ownership of investing yourself and working with a professional. This will include account/custodian fees (e.g. online platform or pension provider) and the costs of underlying investments and management costs.

Remember to consider any initial costs in the calculations. Certain advice firms can charge significant percentage fees on new investments, which can run into many thousands, or even tens of thousands on large investments, which are tantamount to nothing more than sale commission for the adviser and of no value to you.

In terms of professional fees, it is important to consider what you are paying for and what services are valuable to you (i.e. points 3 - 6). The total cost of working with a professional will likely be higher (although not in all cases) than managing investments yourself; the key point is whether the additional services provided are likely to be worth the additional cost to you

We’ve spoken to several people – and taken a couple on as clients – for whom the answers to 1.) and 2.) has led them to self-managing their investments. The realisation that led them to speak to us was that their spouse would not answer 1.) and 2.) in the same way and they would want and need professional help.

They’ve wanted to “get someone on their team” who would be familiar with them, their financial position, objectives etc and be able to help their spouse and family immediately in the event of their ill health or death.

If you have a spouse and you are both involved in managing the investments and both in a similar position then this will not be an issue. Similarly, if one spouse isn’t as involved, but you have relatively straight forwards circumstances, you both may be perfectly comfortable with you self-managing investments now and then getting professional help in the event it’s ever needed.

Considering all of the above together, we can broadly see factors that may steer someone towards self-managing investments and those which may encourage them to seek professional help.

At one end of the scale, if someone had the inclination and time to manage their investments and believed they could so in a structured way, had simpler financial circumstances and was unlikely to benefit from other tax and financial planning services we can see that self-managing their investments is likely to be appropriate for them.

On the other hand, if someone had larger and more complex financial circumstances or they weren’t willing or able to devote the time they needed to managing their investments, then working with a good professional is more likely to be beneficial.

If you would like to talk to us about any of the above, you can book in a free initial phone call or zoom meeting at the following link: