As a fairly prolific media IFA, I’m often asked by personal finance journalists to recommend an investment fund or two which I particularly like.
When the article in question is about a particular investment sector, this is relatively straightforward.
We can refer to our comprehensive fund research which looks at consistency, risk-adjusted returns and costs to identify potentially suitable funds in that sector which are worthy of further consideration.
But when the article is broader, for example looking at a reader case study, often an investment fund isn’t the answer.
Selecting suitable investment funds comes right at the end of the advice process.
Where in the past it might have been a big part of what independent financial advisers did, claiming to be adding value through their wonderful fund picking skills, now it is simply part of a wider financial planning process.
Before picking funds, readers of the personal finance pages should think about their goals and what they need to do in order to satisfy these goals.
Speaking to a journalist this morning, I explained that before picking funds, the case study she had in mind should be thinking about numerous other things.
They had some good financial planning goals (paying school fees for their grandchildren, taking foreign holidays and buying a holiday home in another country) but they needed to quantify these, in terms of cost and timescales.
Once quantified, they should create a lifetime cash flow forecast to ensure they never ran out of money.
There is a balance to find between how much they want to spend on each financial objective and how much they can afford to spend.
Similarly with risk, it is important to understand how much investment risk they want to take (their attitude towards investment risk), how much investment risk they are capable of taking (their capacity for risk) and how much investment risk they actually need to take.
Before knowing these things, no adviser should recommend an investment fund.
The answers to these points will shape the most suitable portfolio of cash and investments, with clients often discovering that they need to expose far less of their wealth to risk assets than previously thought.
Where an IFA with a product sales mentality is likely to approach a client case from the direction of investment fund selection, professional advisers start with objectives and financial planning in mind.
The answer often is not an investment fund, something that readers of the personal finance press should always keep in mind when reading about our ‘favourite’ funds.
