Understanding the risks when investing

The financial crisis may be behind us but its effects are still felt in the area of wealth management.

"There has been a huge change in the work we are seeing," says Dan Moroney, investment strategist at Investec Wealth & Investment. "Pre-crisis all anyone was looking for was a stock-buying service; basically which stocks to buy and sell."

Sustained Celtic Tiger rises in share values saw many people who considered themselves cautious investors plough all their money into too few shares – often just one bank stock – oblivious to the fact that they were in fact taking a massive risk. The result was a complete loss of capital.

Part of the problem was that, for the vast majority of the population, equity investment was a newfound pursuit.

“Ireland was unique in that it was only in the late 1980s and the 1990s that we had a middle class with enough disposable income to invest in stocks and shares,” says Moroney. We were novices who, unsurprisingly, made rookie mistakes.

“That coincided with a period of 15 years where everything was going up in value so if you, in an advisory capacity, were cautioning people about the importance of having a spread of asset classes to invest in, you were ploughing a very lonely furrow. Clearly that was unsustainable, and it ended very badly for a lot of people,” says Moroney.

“Investors learned their lessons the hard way. So now, the types of returns may be less spectacular, but the kinds of losses they stand to make are more manageable because people are much more aware of the need for a balanced, varied approach to investment.”

A feature of the market now is that there is zero return from conservative vehicles such as government bonds. “So investors are learning that they have to extend their time horizons and invest in asset classes that are a little more volatile at first, but which are likely to build up over time.”

A greater understanding of risk is required. “The tendency with private investors is to fixate on the short term and that is understandable,” says Moroney. “You turn on the TV and there is always something to be worried about and no end of people out there ready to tell you that the end is nigh. We call them pundits and they are in the wonderful position of not having to manage anyone’s actual money.”

It is much more exciting to talk in terms of crashes coming than of building value over time, he says. “That makes it difficult for advisors to say to clients, ‘Take a 10-year view. Yes you could be down after a year, but that doesn’t matter, and if it’s a pension, that’s a good thing because you’ll buy in cheaper next year. But that’s hard for investors to hear.”

Private investors should not be concerned about the next six months, “but be relentlessly focused on the longer-term horizon. That’s the big advantage private investors have. If a financial advisor does their job well, their client understands that markets will fall and rise and that’s a feature of them. Over the longer term, they go up, just not in a linear way.”

There are other changes in the market too, including a nascent interest in social impact investing. “Traditionally an area for charities, ethical investment is not new but the next generation, the Millennials, want to ensure they are not just getting a return on their investments but are having a social impact in some way too,” says Adam Cleland, head of wealth advice at Davy Private Clients.

The way in which people engage with their wealth managers is also changing. “Historically, the relationship between an investor and a financial advisor was transactional and once-off. Now it’s much longer term. It’s about establishing what a person’s long-term goals are, what it is they would like to achieve with their investments, and having someone who can advise them of what is required to meet these goals,” says Cleland.

The fact that retirement savings responsibility has been pushed back onto individuals is also driving demand for personal wealth management advice over a person’s lifetime. “In the past, people looked to companies and the State to provide pensions,” says Cleland. “Now that responsibility is increasingly put back on to people. On top of that is the fact that, at retirement age, you could easily have 30 years left. The old image of the retiree having a bunch of cash and bonds to retire on is not a reality any more. Indeed, if you had done that at retirement in 1990, and kept all your money in cash, you would likely have run out of it by now.”

Today it’s about working out whether you want to retire and travel, or ensure you have enough money for healthcare later on. “It’s about finding out what’s important to you. A good advisor will work to achieve that outcome for you,” he says.

It is for this reason that “Roboadvisors” – algorithms that provide an automated investment service – are viewed as less of the threat to existing advisors that they at first appeared.

“Roboadvisors are likely to be used for low value, transactional type services such as portfolio rebalancing, not the higher end of the market relating to people’s life journey and how to finance it, which by its nature is more complex,” says Cleland.

How we pay our investment advisors is changing too, with a fee-based model increasingly likely to replace commission. “Historically, people thought financial advice was free but of course it wasn’t. They just didn’t realise the life companies were paying for it. But you have to ask yourself, if the life company is paying, whose interest is that in?”

The case of Degiro: one of Europe's largest brokers Online broker Degiro is a low-cost share trading platform providing institutional rates to retail clients.

The Dutch-based company, which is active in 18 countries including Ireland, carried out 6.9 million transactions in the first half of 2017, making it the fastest growing and one of the largest brokers in Europe.

Its customers are primarily 30-plus but it has a high proportion of younger investors too, according to Paul Laverty, Degiro’s head of business development UK and Ireland.

“One trend which is becoming apparent is that younger investors are becoming more active in the number of trades placed. What this says to me is that Millennial investors are starting slow, becoming familiar with the ins and out of share dealing and managing their investments, but getting involved at a younger age,” says Laverty. As well as low-cost trade, the fact that Degiro doesn’t levy inactivity fees appeals to them.

Younger investors also appreciate the user friendliness of online platforms, he says. In Degiro’s case online registration takes 10 minutes and requires no paperwork. Clients then use a mobile app to manage their account. “Probably more than anything though it is cost,” says Laverty. “Millennials and younger investors aren’t used to paying the previous standard €15-plus per trade, and they know how to find a deal.”