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Blame game - Should investors ever reproach themselves for their advisers' errors?

25/07/2014

Nick Kirrage

Nick Kirrage

Fund Manager, Equity Value

Ian Kelly

Ian Kelly

Fund Manager, Equity Value

To what degree should investors ever blame themselves for the mistakes of their investment advisers? Here on The Value Perspective, we were tempted to take a few steps towards this particular ethical minefield after reading an article about one small but interesting differentiating factor between an economic downturn and a financial crisis – the practice known as ‘financial looting’.

This is where the owners of a company engage in especially risky behaviour – for example, by taking on too much debt – but they do so not because they have high (if misguided) hopes for the business in the future but because they are looking to extract as much as they possibly can from it today, in the shape of dividends and current profits. Clearly, in this instance, investors would have someone else to blame other than themselves – as indeed would any adviser who had, in good faith, counselled them to put money into the financially-looted firm. But what about investors and advisers currently taking a punt on the sort of high-risk but low-yield debt we have highlighted in articles such as Sale of a century and Balancing lacked?

If interest rates do start to rise – hardly an outside bet in the current circumstances – and investors do lose money on their sterling-denominated 100-year Mexican bond, say, or the so-called ‘high-yield’ debt that is yielding less than 5% for the next 20 or more years, then ultimately is there really anyone else to blame but themselves?

And yet there are, for example, model portfolios operated by private banks that have maybe 5% or 10% allocated to this sort of more speculative-grade debt. One might reasonably argue anyone rich enough to be a client of such a private bank would also be rich enough to employ someone with a better idea of the balance between risk and reward – or at least seek a second opinion.

There is an interesting if subtle difference here between this current behaviour and that of investors in the run-up to the bursting of the technology bubble. One might argue that both instances have seen any awareness of the potential dangers of being invested trumped by what is perceived as the even greater risk of not being invested – in effect, the fear of missing out.

However, while any investments in technology in the late 1990s would have related to what we might characterise as  the ‘greed’ part of a portfolio, there are now likely to be many people in a situation where there are elements of the supposedly ‘safety’ part of their portfolios that could be egregiously overvalued.

Prevailing financial planning wisdom maintains certain investors should have certain allocations to bonds but how many avowedly cautious investors does that currently leave with chunky allocations to supposedly low-risk gilts at a time when interest rates are at 300-year lows? What are you to do when that prevailing wisdom tells you one thing and common sense another? Is there any alternative?

Well, cash – despite the limited, if any, real returns on offer – would be one answer and yet how many investment advisers will actually suggest that route? There are echoes here of our piece Prime concern, where we suggested an investment expert might – in some ways, perhaps, understandably – prefer to offer advice that is based more on a desire to keep their job than maximise a client’s returns.

After all, if an adviser switches a client out of whatever bond allocation current wisdom deems appropriate and into cash, the possible outcomes are asymmetric. If bonds blow up the next day, then the adviser may well receive a nice little bonus and yet, if bonds strengthen over the next few years or even if they stay exactly where they are, the adviser may well receive the sack.

Can you blame them for keeping their clients in bonds? More pertinently, perhaps, will you?

Author

Nick Kirrage

Nick Kirrage

Fund Manager, Equity Value

I joined Schroders in 2001, initially working as part of the Pan European research team providing insight and analysis on a broad range of sectors from Transport and Aerospace to Mining and Chemicals. In 2006, Kevin Murphy and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Kevin and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.

Ian Kelly

Ian Kelly

Fund Manager, Equity Value

I joined Schroders European equity research team in 2007 as an analyst specialising in automobiles. After two years I added the insurance sector to my coverage. In early 2010 I moved into a fund management role, and then took over management of two offshore funds investing in European and Global companies seeking to offer income and capital growth. 

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