Choosing the best investments

Life was easy back in that golden age – markets did not go up and down, they just went up. Today, they just go down. The bear market has everything in its grizzly grip. Which makes life altogether very different for independent financial advisers.

Throughout the last decade, IFAs became an integral part of the work of many accountancy practices. Personal and corporate clients were counselled at a time when the market was giving many a good reward.

Many would have advised, throughout large parts of the 1990s, to invest in raging equity markets or to put money into new technology companies. A cynic might suggest that anybody could have given advice in such affluent times.

Today, an IFA’s work is much harder. With the burst dotcom bubble now a fact of history and an equity market down from the 6,900 mark to around the 3,000s, different strategies are needed.

Sound financial advice is probably more necessary today than at any stage over the past decade. But it is harder now than ever to give the right advice. ‘It is a difficult time,’ says John Clay, a partner at Morley and Scott, a small to medium-sized firm of accountants with a turnover of around £8m.

‘We are having to work more closely with clients. We have to look at individuals and do a lot more work with what is appropriate for them.’

Mike Pole, director of Numerica Financial Services, concurs. ‘It is not easy and straightforward. It is bringing it right back to the client’s objective and how much risk they are prepared to take. It makes our job, in terms of advising clients, a bit more difficult. We have to make sure we meet their expectations and objectives.’

One of the first tasks for an IFA over the past 18 months or so has been to downgrade clients’ hopes in line with the readjustment in the markets.

They have to explain that the markets’ decline affects them as well as other people, and warn them that whatever advice they follow, they will not make as much money as in the recent past.

‘Some expectations are still unrealistically high with some expecting double-digit returns. Real returns are not going to be at that sort of level for a number of years,’ says Martin Cross, a director with Solomon Hare Personal Finance Limited, which has a turnover of around £1.5m.

So, what sort of advice are IFAs giving to clients at the moment? ‘Our long-term advice has remained relatively consistent. We like to see debt reduction as our first priority,’ says Cross. For personal and corporate clients, he advises a reduction of debt in areas such as mortgage arrears.

Life insurance policies and pensions schemes can also be renegotiated, in some cases bringing costs down by 50%.

Reducing debt might, eventually, free up some capital that can be invested.

But with the raging bull market now history, are clients better off sticking to the tried and tested policy of hiding the money under the mattress until the bad times have finished, rather than investing?

Unsurprisingly, IFAs think this is not a wise course of action. They claim there are still areas where money is to be made. And, possibly even more surprisingly, that money can be made in the equity market.

Although, as Clay puts it, clients ‘have a degree of concern about going back into the equity market’, there are still sensible ways to invest.

One of those sensible ways is to reduce the levels of risk in any portfolio.

Clay says advice now centres on putting on a maximum of 20% of a client’s portfolio in any one financial area.

‘People have learnt from experience that they are not massive risk-takers,’ he says. Clients have to be reminded that investing on the stock market should still provide returns – in the long run. ‘If you take the five-to-10 year view, (equity) is going to provide good value,’ says Pole.

The market also has to stop going down at some point so some wise – or lucky – investors will enter equities at just the right time.

But there is life outside the stock markets. IFAs report some clients are getting involved in US and UK insurance markets and in ‘different asset classes’, such as hedge funds, corporate bond markets and gilt stocks.

The IFAs say the trick, should you want to make money at the moment, is to keep investing, but to make sure any portfolio is balanced and spread wide. This might seem obvious, but it is sound, practical advice. There is many an anecdotal tale of investors piling all their money into high-tech stocks and then being hit very hard when the IT bubble burst a few years ago.

Similarly, when times are hard many refuse to countenance any form of investment. But financial advisers say today is not all doom and gloom.

The approach now is to keep investing, but also to adopt a rational strategy and not to put all your faith in the equity market.

‘For pretty much a decade we had short-term blips in a raging bull market. Now with equity markets returning to levels of seven or eight years ago it is a sanguine reminder that equity isn’t the answer,’ says Cross.

The general message seems to be don’t be scared to invest – it won’t always be a bear market. All you have to do is know when to time your entry into any investment and then where to put your money.

• For the Association of Independent Financial Advisers, go to www.aifa.net.