Case Study Brief

I was recently referred by an existing client, who worked as a fund manager, to a former colleague. Lisa worked in the City for a well- known and reputable fund management group. However, Lisa felt she was too close to the day to day market 'noise' to effectively look after her own investments. She was concerned that she over traded, made too many 'knee jerk' reactions and focused too much on the short term rather than taking a longer term view.

Lisa knew a lot about her specialist sector but she did not know very much about anything else and wanted someone to help her let go and manage her investment portfolio on her behalf. In summary, she was looking for someone to challenge her thoughts and ideas, add value in other areas and then make her take action.

This is a real life case study. Names and some other details have been changed to protect confidentiality.

The Case Study

At our first meeting Lisa gave me a simple one page of data. It listed her current income and expenditure and her assets. These were as follows – Salary £85,000 plus bonus (historically £150,000 - £230,000), Cash £50,000, ISA Portfolio £760,000, pension portfolio £680,000, house £1.1 million, surplus monthly income £1,000 and a mortgage of £420,000.

She was 49 years old and living with her partner David, who was 52. David was a manager at a stockbroking firm on a salary of £75,000 plus a modest bonus. His surplus income was £1,200 per month he had £30,000 in cash and was a member of his employer's pension scheme. However, David also had a number of pension schemes from his younger days, no debts and an ISA portfolio worth around £160,000. David was also renting out his flat which he owned before he had met Lisa and; for which he received £2,200 net of expenses per month.

Initially, Lisa did not want to discuss her partner's financial circumstances and wanted to make sure that she was capable of ascertaining her own financial independence. They had no plans to marry. The couple shared the main expenditure of Lisa's home and kept any surplus income they each had. This allowed them to take three very nice holidays a year. Both had simple wills in place. Lisa mentioned only one objective and that was to retire at 65.

I asked Lisa about her long term goals, aspirations and fears, and what she really wanted to achieve out of life. She had never been asked this before and had been running her life on auto-pilot. This is not too indifferent to a lot of clients I meet on a regular basis. We spend a lot of our working lives working for our employer or in our business, is it not important to take some time out and think about what we personally want in life?

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I tend to look at matters from this perspective and this means clients have to do some deep thinking, but once we have been through the process it gives clients a real sense of what we are trying to achieve. It is simply not about fund performance but I believe it's also about goals- based investing.
I set out to frame portfolio discussion in terms of Lisa's long term goals and her total wealth and not to just concentrate on evaluating her individual holdings. Although this is important, it is a secondary consideration. Lisa stated that, even though she loved what she did, she did not want to do it until retirement and then 'tend to a garden of roses'. It really made her think about her life. She had always wanted to travel, experience different cultures and be close to nature.

We discussed her ideal vision in detail and it became apparent that she was very passionate about her ambitions to travel. Lisa was attracted to Africa and had considered moving there one day. In particular she wanted to help an elephant sanctuary she had visited several times and be more actively involved, rather than just support the sanctuary financially. This discussion really excited her and she was glad I had really taken the time in our first meeting to find out about her as a person and what money really meant to her.

Having asked Lisa many questions, it became obvious that she wanted a good review of her assets and had not really thought about her retirement strategy in any detail. The meeting had taken a different route to normal and we soon ran out of time. We had not discussed the financials in depth but we both felt the meeting was very rewarding.

I asked Lisa to complete a risk profile questionnaire and send it to me along with her various holdings in her pension and ISA portfolio. I also asked her to put some numbers on her ideal vision so I could do some cashflow modelling. I call this visioneering! It was apparent Lisa was very proud of what she did and she was good at it. She was, by nature, very technical and had a good grasp of fund management. I really wanted to get an understanding on her decision making style, so I could know what her biases were. I had undertaken a lot of research into behavioural finance and how emotions affect decision making. This is important and even more so for a fund manager.

Lisa was an over confident investor and control was her main bias. Perhaps her day to day role helped create this. As a bias it became apparent that she believed that she exercised more control over her investments than she actually did. We both came to the conclusion that she was unduly optimistic, overestimated her own ability and overlooked the broader factors influencing her investments. She did not mind us being frank in this area and I suggested that she used our portfolio modelling techniques to rebalance her ISA portfolio.

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In other words, make a decision to avoid being swayed by current market conditions, fads or recent performance of a hot investment. I believe Financial Planners have an important role to play in helping clients achieve effective portfolio diversification while helping them avoid concentration of risk in a single investment. I cautioned Lisa that familiarity with a particular investment or asset class is no substitute for a good spread of investments.

Lisa was very happy I had taken the time to understand her decision making style in detail and to understand her different biases. I believe we cannot cure the biases but can attempt to mitigate their effects. I explained that we do not focus simply on risk versus return but also on Lisa's tendency towards over confidence in rising markets and undue loss aversion in faltering markets - a result of the discussion we had when we took an in depth look at her risk profile questionnaire.

We looked at the output of various cash flow assessments and scenarios and it was obvious that she would be able to meet her financial goals simply by delivering a small real rate of return per annum net of charges. Lisa stated that she was very happy with my advice and mentioned she was rarely challenged over her investing style, probably because everyone believes a fund manager knows everything there is to know about investing. I explained this is where I was different to the standard adviser.

I suggested that we make any changes on a piecemeal basis and look at the ISA portfolio initially. Lisa's portfolio was not structured according to her attitude to risk. She was over-exposed to emerging markets and to several countries in particular. We rebalanced her portfolio more towards fixed income and introduced some exposure to commercial property; an asset class which provides steady returns, not correlated with the stock market. We also increased the UK domestic market weighting of Lisa's portfolio, using higher yielding funds and funds geared towards providing her with a rising investment income.

The source of Lisa's ISA wealth was down to making use of her annual allowance long term. I believe this was an important driver of her decision making style. Many of the funds she was invested in were actively managed and; rather than reviewing performance say on a quarterly or bi annual basis, Lisa was consistently tinkering with the asset allocation. She was making the wrong tactical calls by reacting to the 'noise' in the market place. I asked Lisa how she felt about the work we had done together so far. She said she felt it difficult to let go of the decision-making process but trusted my judgement and was relieved that it would be managed by St James's Place, in which my business is a practice partner, and guided by an investment committee working with several other independent investment consultants.

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It was no surprise to Lisa that around 80 per cent of fund managers do not manage a fund for more than three years. St. James's Place has a process to actively manage the fund managers in whose funds we invest. This is to the benefit of all of our clients. Lisa and I then discussed in detail the research capabilities we had available and the distinctive, automated process of fund manager review and selection.

In order for Lisa to benefit from our process, we transferred her ISA portfolio to the St. James's Place investment platform. We also discussed her pension portfolio and she suggested that I also speak with David and advise him on his various assets. Lisa lived in the world of data consumption, which had been shown to have adversely affected the performance of her portfolio.

I helped Lisa leave behind the false security and 'noise' of day to day analysis and focus on her goals. It is of paramount importance for everyone to align their gaze with their personal goals with sensible investment timelines in order to make the correct investment decisions.

My experience tells me that clients are looking for simplicity, safety, and surety and it is very important that we help them chart a course that matters to them personally. A quote that encapsulates this is one by Holocaust survivor and neurologist Victor Frankel, who said: "Those who have a why to live can bear with almost any how".

WHAT HAPPENED NEXT

Now that Lisa had a good understanding about goals-based investing and my approach, she has also decided to transfer the majority of her existing pension portfolio to our investment platform. She has kept the existing scheme open to continue to receive regular employer contributions. David did something similar with his pension pots and has also become a client of my practice. We are in discussions about how best to restructure his ISA portfolio.

As I have a number of very good links with other professionals, I have referred them to a City law firm to review their current wills free of charge. Lisa and David have a better understanding of their investments and the balance of their respective investment portfolios. They also have a better understanding of their decision-making biases. The couple have introduced me to a number of their colleagues so I may help them in a similar way.

KEY POINTS

1. We must understand our decision-making biases
in order to have an effective investment approach that will work for us, no matter how much we think that we already know.
2. We must align our vision with our goals and then work to a set timeframe in order to understand what 
is the best way to structure our investment portfolio.
3. There is no harm in dreaming and it is worthwhile asking an experienced qualified Certified Financial Planner professional for value added advice.

BIOGRAPHY

Parminder Bains CFP^CM Principal of PSB Wealth LLP

Parminder provides professional wealth management, strategic investment and tax planning advice to private individuals and corporate clients. He holds Certified Financial Planner^CM professional and Chartered Financial Planner statuses. His practice has been built purely by personal recommendation and introductions. He has 18 years of experience and has carved himself a niche in the City working with high net worth clients – primarily those with £500,000 to £5,000,000 in assets - though with some above this range. He is married and has recently become a father again. Parminder and his wife are now proud parents to a son as well as two daughters.

This email address is being protected from spambots. You need JavaScript enabled to view it.

0207 638 2400

www.psbwealth.co.uk