As I approach the end of my regulatory supervision period, and hopefully my Post Graduate Diploma by the time this article is published, I have been reflecting on some of the basic principles of financial planning. One of these is deceptively simple: choosing the right fund for the right purpose.
Let us be honest here: we cannot expect a Mini Cooper to do the job of a 4×4 Hilux if you are heading into the mountains for the weekend. You can try, but inevitably you will get stuck in the mud at some point, on a single track, with little to no reception.
Likewise, we should not necessarily expect equity performance from a money market fund, and vice versa.
An easy example, and a cornerstone of financial planning, is setting up an emergency fund. The purpose of the fund is for the money to be easily accessible at short notice. Using a fund with a five year investment horizon and high volatility is not the best idea, while investing for those unexpected expenses (vet bills, more often than we would like to admit) in a highly liquid, low volatility investment such as a money market fund makes far more sense.
Similarly, when planning for retirement at age 21, you would potentially have a greater allocation to equities, within the limits of the relevant regulations, than you would at age 45. Circumstances and objectives also change over the years. You could start out as a singleton, and ten years down the line have a partner, two children and an elderly parent to look after. Herein lies the value of regular reviews.
Then there are the funds in between: not quite an emergency fund, but money needed to purchase a vehicle in the next few years. What do you do then? Depending on the goal, risk tolerance and how certain the timing is, defensive and stable funds come to the rescue.
Thankfully, there are plenty of fund managers who cater for a variety of investment periods, objectives and risk profiles. Some investors also have a preference: pure equity before bonds, or property before anything mining related. They may also be ethically minded, and prefer to avoid funds with links to particular companies or industries.
Another factor we take into account when considering fund allocations is what is happening in the rest of the world. Geopolitics can have a significant influence on markets, and it is one of the first things I was taught when I started my journey.
The naming conventions of funds can also be utterly confusing. What do you mean, a Diversified Income fund is not the same as a Managed Fund? A Gilt? I thought this was a bond? There are funds with more local exposure and funds with more global exposure, and let us not get into Regulation 28 of the Pension Funds Act, otherwise I will end up writing a ten page dissertation instead of an article.
Luckily, this is what we are here for: advice when everything feels overwhelming and nothing quite makes sense. When I first started at NFB over eight years ago, someone very wise told me that we were in a fortunate position as an independent FSP: effectively in a supermarket, able to compare different brands and then choose the one best suited to our client. I was reminded of this recently in an advisor’s meeting. We are fortunate to be a hybrid brokerage with our own asset management division, giving us a wide variety of well researched options to draw from, so that we can provide appropriate advice based on the client sitting in front of us.
Choosing a fund is not simply about finding the one with the best return.
A fund that delivered the highest return last year may be completely inappropriate for money you will need next year.
Now that I am nearing the end of supervised advice giving, taking the time to properly consider fund allocation for a client, while potentially frustrating for an administrator working through the paperwork, makes complete sense once you are the advisor sitting across from the investor, hearing their story and understanding their goals.
