Personal finance and investing columnist at the NZ Herald

Brent Sheather: Lies, half truths and expert commentary

The reality is that ethical companies are a continuum with, at one end of the spectrum, the least unethical companies and at the other end the most unethical. Photo / Getty Images
The reality is that ethical companies are a continuum with, at one end of the spectrum, the least unethical companies and at the other end the most unethical. Photo / Getty Images

Despite the efforts of the FMA and the Commission for Financial Capability lies and half truths masquerading as investment advice are regularly inflicted on the unsuspecting public via expert commentary in the media.

If Winston Churchill were alive today he might be moved to say "never has so much bad advice been inflicted so often by so many experts".

Some of the recent, outstandingly bad, instances of bad advice from experts include:

• "The higher the fees you pay the higher will be your returns" and similarly "returns are more important than fees".

• Dealing with an organisation that only sells its own high cost products is not a problem because they are required to "put your interest's first".

• "Power dressing and positive thinking are essential strategies for investment success".

• "Saving money on little things like that morning coffee is an important component in fulfilling investment objectives."

• "Whilst passive funds invest in unethical companies active funds don't".

The reality is that ethical companies are a continuum with, at one end of the spectrum, the least unethical companies and at the other end the most unethical i.e banks and cluster bomb manufacturers.

A cynic would further observe that most active funds are themselves unethical because they appropriate most of the risk premium and that it is doubly ironic that the ones that label themselves "ethical" generally charge the higher fees.

• If you are lucky enough to be a high net worth individual then paying 2-3 per cent of the value of your investment portfolio each year to your private wealth manager in return for her organising children's parties, social events and the servicing of your helicopter is essential. If you are really lucky your private banker will provide a "bespoke, holistic service" involving "insight" and "thought leadership" whilst at the same time being "proactive".

And you never know hanging out with the wrong crowd might even get you in the next edition of the Real Housewives of Auckland but, be warned, there are other conditions like being totally crass and not having a proper job.

That's just a short list of the expert commentary rubbish that Mum and Dad should, and probably do, ignore. Perhaps the key to discerning good expert advice from bad expert advice is to "follow the money" and if the purveyor of the free advice works for a high cost fund manager or whose business in some way feeds from the same trough then into the bin it goes. The problem is that none of the experts are accountable for bad advice.

It seems you just "talk your book" and then move on to the next victim. It is a pity that the FMA can't put these experts in jail for making stupid, obviously biased, statements about financial matters or maybe it's time for a vigilante group to dispense rough justice. Maybe I have been watching too much of Narcos.

But, occasionally, someone who doesn't work for a bank, says something useful. As you can appreciate these instances are rare so should be embraced wholeheartedly by sensible people.

An example occurred last Friday in the London Financial Times where John Authers, author of the Long View, set out what he thought were eight important investment lessons. Back in 1980 the Long View was written by Barry Riley and when he retired Philip Coggan took over.

After about 15 years Philip moved to write the Buttonwood column for the Economist and for the last decade Long View has been written by Mr Authers. I have been lucky enough to have been reading the Financial Times since 1980 and it is probably the best, most unbiased, source of good advice on matters financial that there is.

Unfortunately for reasons known only to the Code Committee it's not regarded as Continuing Professional Development for financial advisors. My guess is no one in the Code Committee have ever read the FT which speaks volumes about the Code Committee several of whose members have contributed to the ever expanding library of bad advice.

A recent highlight being the notable comment by one, a few years back, to the effect that "I'm not buying long term bonds because interest rates are too low". That worked out well, not.

Anyway back to the Long View. The story was entitled "Taking the Long View in investing: eight lessons".

Here are the eight lessons:

1. "Always worry about costs. You do not know about future returns, but present costs are known, and likely to be extended into the future. (This is even more important when yields and returns are so low)." This is obvious or rather it should be but fund managers, particularly the high cost ones, persist in trying to confuse people and they are very clever using statistics of their historic performance if it suits their purposes.

2. "Be humble. The market is not perfectly efficient, and is not always right (as 2008 showed). But most of the time it is efficient enough to make it close to impossible to beat.

These two precepts together mean that passive index funds should be the bulk of a portfolio."Note that this advice doesn't apply if you are Warren Buffett but remember that Warren recommended that his wife, upon his death, invest in a Vanguard index fund.

3. "Rebalancing is the gift that keeps on giving. Set an asset allocation, and rebalance regularly, and you regularly buy more of assets that have just fallen, and take profits in assets that have risen. It works." The lesson today for local investors is that they should not fall in love with NZ stocks even though they have performed very well. Best practice is to be diversified.

4. "It is as much risk to be out of the market as in it. Gains (like falls) tend to come in a rush - as in the spring of 2009".

5. "For those who want to beat the market: look at the price you pay. All else equal, the greater the price you pay, the lower your potential return, and vice versa."

6. "Know what you know, and know what you don't, and only attempt to beat the market when you have good reason to believe you know something that others don't." To this you could add that not only do you need to know what others don't but you also need to know how the market will react once everybody else finds out what you know that they didn't.

7. "And if you're serious about giving this all the time you've got - look away from the public markets. The public markets are ever more efficient, making it ever harder to beat them, but beyond it, there may still be bargains." The problem with this strategy is that it is often difficult to be properly diversified in the non-public markets.

8. "And most importantly, there are far more important things in life than finance. Few of us have the privilege not to have to worry about money. But we should deliver ourselves from the agonies of investment choice to the greatest extent possible - and get on with the things in life that really matter."

- NZ Herald

Brent Sheather is an Authorised Financial Adviser. A disclosure statement is available upon request. Brent Sheather may have an interest in the companies discussed.

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Personal finance and investing columnist at the NZ Herald

Brent Sheather is an Authorised Financial Adviser and personal finance and investments writer

Read more by Brent Sheather

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