Mark Lee interviews financial guru, Saul Djanogly who has some unorthodox views about financial advice that may resonate with accountants.The interview was published on Accountingweb on 22/7/13.
ML: I know you like working with accountants Saul. What is it that they seem to find of interest?
SD: I think it stems from a shared interest in the numbers. Accountants want to get a ‘true and fair picture’ of what is going on. I like to start conversations by asking them, “in terms of your own personal investment portfolios or those of your clients who you advise, do you actually have a true and fair picture of all the costs, fees and charges?” Invariably the answer is ‘no’ because the whole area of fees and charges in the investment world is so opaque.
ML: Obviously this is a good angle and the subsequent discussion may help them better understand the related issues that they could discuss with clients.
SD: Yes. That’s the main point. Few accountants are comfortable or allowed these days to discuss financial products with clients. Of course the costs, fees and charges need to be considered in context but this is an area that accountants can help clients to understand.
ML: That makes sense but I sense that many accountants are nervous of interfering in the relationship their clients have with financial advisers. What do you think an accountant should be looking out for and what should they be talking to their clients about in the context of financial advisers?
SD: In the first place, clients many times will volunteer to their accountant that they are unhappy with their current adviser. That can be a good starting point by simply asking the client what is making them unhappy? Usually it’s around the areas of service, relationship, sometimes performance and that can be a prompt to ask good questions. One of those is “do you actually know how much you are paying in fees and charges to your current adviser?” The answer usually is that no they don’t.
ML: How does that leave the accountant? Accountants will either have relationships with financial advisers they are happy to recommend or be hesitant about recommending anybody specific.
SD: Let’s step back for a moment. Accountants deal in numbers and the most effective accountants are those who bring those numbers to life for the client. I think it’s the same in terms of a financial adviser. Too many financial advisers are in the financial pornography game.
ML: Right, well that’s the title of this article sorted! But what do you mean by ‘financial pornography’?
SD: Let me ask you this: Have you ever come across a client seduced by advisers promising future returns? We all know rationally that nobody can guarantee future performance. But some advisers raise expectations, bring clients on board and inevitably the reality disappoints. The client is unhappy and as a result they move on to the next financial pornographer. You see this with clients who over the course of 20 years have gone through several advisers and in each case what happens is that the subsequent experience doesn’t match the initial fantasy.
ML: I think I get the analogy and I’m glad you didn’t paint the picture too graphically! What can accountants do to help avoid this problem?
SD: The first thing is to cut out the financial pornographers. So any adviser who claims to know what is going to happen in the future and claims to predict future returns should be handled with extreme care. The most important thing is for an adviser to admit what he doesn’t know; and what none of us know is what will happen in the future. As one of my mentors said “people who have crystal balls end up eating ground glass”.
ML: I take your point, but there’s a catch-22 here isn’t there? Any adviser who admits their experience is not capable of helping them anticipate what’s coming just seems less credible than one who does make such claims.
SD: That’s the point! An adviser who claims to know the future is playing on our emotional need for a predictable if not certain future but he’s making promises he can’t deliver on because nobody knows what’s going to happen tomorrow let alone over the next five or 10 years. So he or she seems credible but they’re not. Buyer beware. They want you to follow your emotions not your head.
ML: So if a financial adviser can’t predict the future how can they add value?
SD: Great question. How about something that can be totally and precisely quantified, i.e. fees and charges. All the data shows that high fees are the best predictor of future poor returns. Accountants understand the effect of overhead on the bottom line. A good adviser is upfront from the very start as to what their fees and charges are, what the costs of the funds they’re investing in are and how that could eat into your return. If they’re not totally transparent with you about this, this is another major danger signal. In plain English, that accountants themselves use, this is all about cost-control.
ML: And based on what you’ve already said there are two areas where accountants can help their clients. The first is to be highly sceptical about financial pornography i.e. unsustainable promises about future returns; and also to be on the alert for high fees and charges. Anything else?
SD: Yes – a parting thought. One of the best ways to de-risk a portfolio is to get rid of the human in the cockpit. Does it surprise you that lower cost, passive/index tracking funds do better than expensive, active funds? Any accountant advising a client looking for an adviser should look to see if they are offering the client an option to go low-cost in a combination of passive funds or will they be pushing their own favoured option of an expensive in-house or favoured active manager.
ML: Thanks Saul. Very interesting. Can you sum up your advice for accountants in a nutshell?
SD: Here goes. Accountants and their clients want to make well informed choices. They need to know that there is a different way of doing investment which is about the ruthless cutting of costs -the biggest one being expensive, self-promoting fund managers who nearly always fail to deliver on their promises. Intelligent, low cost passive investing is the way to go. In the US, this approach already accounts for 40% of the market. In the UK it’s only 10%. Accountants who want to encourage their clients to get better value for money will help the UK to catch up here.
ML: Let’s watch this space. I am sure this will spark some interesting comments. Many thanks for your time.
Mark Lee is consultant practice editor of AccountingWEB and writes the BookMarkLee blog. This and his ebooks are for accountants who want to stand out and be more successful in practice, online and in life. He is also chairman of the Tax Advice Network of independent tax experts