Describing the journey from DIY to professional investment management

Chris Kenny, an investment management partner at Smith & Williamson explains the push and pull factors that make self-directed investors enlist professional help with managing an investment portfolio.

Why do you think more and more individuals are making their first foray into self-directed investing? What then prompts them to turn to the professionals?

I think investing your own money holds many appeals. It allows people to feel like they are in control of their money and potentially gives them a chance to seek better rates of return than the poor interest rates that we see today. For the majority of individuals, investment markets are more accessible now than they ever have been and costs have come down considerably. All these things come together to make one feel, “I can have a go at this myself”.

One thing I’ve observed is that lots of people don’t perhaps find investment markets as fascinating as professionals do, so they might become tired of monitoring them. They may also come to find that it takes up a considerable amount of time. But by far the most frequent reason why people begin to consider using a professional investment manager is the level, and complexity, of risk that they suddenly become aware of.

Is this realisation usually the result of an investor losing money or is it some other event prompting them to think about risk in a deeper way?

I believe it’s a combination of both. Making investment decisions is an art rather than a science. I think that at the beginning you might feel, as a DIY investor, you can simply follow a fixed programme or a fixed way of doing things, but the outcome of those is often different than you might have expected.

Things can go awry and that could be down to a single stock, the companies you are invested in having problems or the bank no longer being such a strong counterparty. Things do happen and that can be very off-putting to people who haven’t perhaps understood all of the risks. Investment decisions are, in every case, a balance of risk and return, and typically the more return you expect to get on these the more risk you take. I think that in many private investors’ cases it is difficult for them to understand what risks they have taken and often that doesn’t become apparent until a problem arises.

The other thing is the individual’s appetite to take risk and their willingness to make decisions that are risky. It’s a lot of responsibility; it’s your own money and you can say, “Great, I’m in charge of my own money and my own destiny”, but actually it can be quite overwhelming to be asked to put your own family’s financial future in your own hands completely. Even with more access to investment information than ever before, taking on that responsibility – that necessity to take risky decisions – sits uncomfortably with many people.

What are investors looking for when they come to Smith & Williamson?

When people come to talk to us they are really looking for overall advice and access to a broader range of investments than they might be able to cover themselves through their own knowledge.

Therefore, we work very carefully with each client to understand their investment objectives and their attitude to risk, which helps us to put forward something that is suitable for them. They set the direction and are the captain of the ship; it’s up to us to help them make sure that they get to their destination in the calmest water possible.

How much involvement in their investments do those who started off as self-directed typically want?

Clients want to be involved to a varying level; you need to build a relationship of trust and that takes some time to do. When a client first comes to you, you talk about what they want to achieve – is this money for school fees, for retirement or for buying a property for a child and over what period of time? Then we start managing the client’s investments, taking a lot of time communicating with the client to explain what we are doing, ensuring we are accessible and open.

You find over the years that the client begins to step back and say, “Actually I think the stewards of my capital are doing a good job and I can trust them; I still want to be kept informed, but frankly there are more interesting things in life than trying to work out which investment trust or share to buy today.”

I think there is a typical trajectory that starts with a partnership. The client is very much the senior partner in guiding us, but the mechanics of putting a portfolio together and making sure it remains suitable lie in the hands of the junior partner: the investment manager. That balance changes over time depending on trust and external factors.

What we try to explain to clients is that taking your cherished assets – assets that you’ve spent a lifetime building – and handing them to an investment manager to look after should not be about ceding control. Rather, it’s about handing over the day-to-day mechanics and having an expert to assist you. It’s about having a professional, competent and trusted adviser to help you achieve what you want.

What advice would you give investors who have yet to consult the professionals?

I think generally there’s a gap when it comes to understanding portfolio diversification properly. According to investment theory, diversification can be achieved with a portfolio of 20 stocks. However, if you look carefully at the degree to which different equity markets move in lock-step it’s very great: there’s about a 90% commonality in performance between the US and the UK stock markets, for example. You might think that by diversifying across markets that you are getting something else, but you are still getting equity risk.

There is also the issue of getting your asset allocation right – which is what we think will deliver the majority of returns – and how to alter it in response to changing market conditions. What DIY investors often tend to do is to stick to what they know. So, they might be investing in FTSE stocks and if they are being a bit more cautious they might stop investing in a new technology company and start investing in something like a utility. But what they really should be doing is taking a broader sweep and asking themselves, “What other assets are there that will give me an uncorrelated rate of return?” It’s that breadth of vision that not everyone will have – not unless they are spending their lives investing.

If you’d like to start a conversation with Smith & Williamson please contact the team HERE. They will ensure you get direct access to the investment professional who matches your profile. “[email protected]


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