Welcome to the Intelligent Investor

"For the great enemy of truth is very often not the lie - deliberate, contrived and dishonest - but the myth - persistent, persuasive, and unrealistic. Too often we hold fast to the clichés of our forebears. We subject all facts to a prefabricated set of interpretations. We enjoy the comfort of opinion without the discomfort of thought"

John F Kennedy 1962

JFK was referring to the US economy, but his words are equally applicable to the complex world of modern investing. At Collins Ward we help our clients to understand the nature and realities of modern institutionally dominated investment markets, by dispelling the ‘persistent, pervasive, and unrealistic’ myths that inhibit successful investment performance.

2008 will be remembered as a year when many long-held beliefs were exposed by the severity of market forces. The Intelligent Investor column aims to provide incisive commentary on wealth management issues and move investors, in JFK’s words, ‘to a new, difficult, but essential confrontation with reality.’

January 13, 2008

Impartial advice - you decide

Dear Christian,

What could turn an investment of £1,000,000 into £6,220,000 over 10 years, earning you initial and trail commissions over the term in excess of £123,000?

This was the start of an email I received last week from a fund management house. No mention of the features and benefits of the investment opportunity for a client, but a considerable focus on the rewards on offer for an adviser. Consider this in light of the words of Callum McCarthy, Chairman of the FSA, in a 2006 speech.

“…In the 18th century, we exported our criminals to Australia, and paid on the basis of every convict shipped aboard at the quayside at Bristol or London. On average, 12 per cent of those who were shipped aboard in Britain died en route; on some voyages more than one in three of those shipped died before reaching Australia. In 1792, the system was changed... Shippers were paid for every convict delivered alive in Australia, rather than shipped aboard in Britain. In 1793, three convict ships sailed to Australia transporting 422 convicts, of whom 421 were delivered alive – a mortality rate about 1/50th of what had previously occurred. The new reward structure produced immediate and dramatic change….quite simply, incentives matter. They change behaviour…”

Investment opportunities marketed with a focus on potential returns and adviser remuneration always fill me with scepticism. Ask yourself this question – why are they offering commission? Will a fund not offering commission be utilised even if it offers a better proposition? McCarthy goes on to state “Provider bias is clear: I am struck by the prevalence of examples of providers managing demand – up or down – by adjusting commissions which can lead to less suitable or even unsuitable sales.” There is no doubt that esoteric investments or unknown fund managers often offer increased commissions to attract greater sales. This particular fund was targeting Indian infrastructure projects – certainly not a mainstream sector.

If you value impartiality, you must consult a wealth manager who offers independent and fee-based services. Sadly these fundamental principles are harder to find than you would think, in what is still predominantly a sales driven industry.

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