Adviser underperformance 'a blip'

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Claims self-directed investors did better than those using financial advisers last year should be taken with a grain of salt, a local finance industry figure says.

Wednesday, January 29th 2014, 6:00AM 1 Comment

by Niko Kloeten

New data from US-based website SigFig, which tracks about one million investor portfolios, shows investors who paid for portfolio management achieved average returns of 14.1%, while those who managed their money themselves returned 17.1%.

These results came during a year when stock markets soared (the S&P 500 Index returned 29.6%) and bonds struggled in many parts of the world.

American financial adviser Lee DeLorenzo told Investment News the difference was probably due to self-directed investors’ lower allocation to bonds compared to those who use financial advice.

DeLorenzo said advisers also had an important role to play in managing client behaviour.

“Financial advisers, just because of the market psychology, can keep people calm from making those traditional mistakes: buy high, sell low, stick with a loser and wait for it to come back.”

NZ Funds Management principal Richard James said he didn’t know what the numbers would be for New Zealand investors, but he wouldn’t be surprised if it was a similar story here due to the strong performance of our own share market recently.

And like the US, New Zealand’s DIY investors are probably under-exposed to bonds compared to their advised counterparts, he said.

“I suspect so.  I also suspect those who have been investing in the share market have tended to err towards higher beta stocks like technology, which have done very well in the past few months.” 

However, James said the evidence was clear that over the long term individual investors fared poorly, tending to buy during market highs and sell during market lows.

“The long-term data shows individual investors tend to underperform both the market and investors who use financial advice,” he said.

“However, it would be a certainty that at certain points, due to portfolio structure and the market environment at that point in time, that individual investors as a group would outperform. It may have been in the late 1990s when tech stocks were doing very well, and it may also have been the case in 1994 when bonds got hammered.”

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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