It’s been a great pleasure working over the last few months with RockWealth, financial planning firm based in Cheltenham.
RockWealth approached my company in the spring of 2017 about producing an online documentary about evidence-based investing. The result is Investing: The Evidence, a six-part film which gives the basic information investors need to know about investing and also explains the benefits of working with a financial planner.
I recently interviewed RockWealth partner Mark Vail about the firm’s investment philosophy and how clients are responding to it, and it makes for fascinating reading.
RP: Tell me, Mark, how did you come across evidence-based investing? And why did you decide to explore it in more detail?
MV: I first became aware of the concept of evidence-based investing back in 2008. I went to a Dimensional Fund Advisors conference in the UK and was completely blown away by what I heard. I went back to my then employers and it fell on deaf ears. I wasn’t in a position of influence at that point in my career, but I kept being dragged back to this factual evidence.
RP: What specifically appealed to you about it?
MV: Well, the more I researched, the more I couldn’t ignore it. It blew out of the water everything I thought I knew about managing clients and their money. It just kept pulling me back to this evidence-based approach.
RP: How did that lead to you joining RockWealth?
MV: Well, there is a bit of a story. When RockWealth’s founder Tim Horrocks and I were introduced to each other a couple of years ago, we very quickly realised we shared very similar values in terms of what we thought a financial planning practice should look like. Where we differed was that I had gone down that route of conversion to evidence-based investing, whereas Tim hadn’t been made aware of the evidence behind what I knew. We spent six-to-nine months doing due diligence on each other and, as a condition of us setting up the RockWealth you see today, Tim went through the same process that I had, reading what I had read and attending conferences. That evidence-based process now underpins every portfolio that we look after.
RP: Why do you think there aren’t more UK advisers who’ve gone down this route?
MV: I think there are lots of reasons. For me, I would suggest that the regulators’ stance that we have to advise on a suitability basis rather than a fiduciary basis as a standard makes it very easy for people to ignore the evidence. I’m sure there are advisers who are not even aware of the evidence, although it’s clearly there for the taking. But I think when you set yourself up to act on a fiduciary basis you have a moral obligation to act in the client’s best interests. If you follow that through to its logical conclusion, I’m not sure how you could manage clients’ money any other way. As an adviser, when you see the evidence and understand it, from an ethical point of view, it’s impossible not to do it.
RP: I find it odd that other professions take for granted that everything should be evidence-based, and yet the financial profession doesn’t. What’s your view on that?
MV: Evidence-based investing is based on the same evidence-based method that has led to such tremendous advances in areas like medicine. It’s interesting that science has played relatively little part in advancing our ideas about capital markets, when we have 50 years of research now that have improved our understanding of how markets work and what factors drive returns and provide the best probability of a successful outcome. We also know about the factors that have unnecessary risk attached to them and a greater chance of failure.
So it’s remarkable that professionals typically continue to manage money on flawed assumptions. If you go to your doctor with a condition and they say amputation is the answer, that is absurd. Yet money managers still base decisions on assumptions, which is equally as absurd. Basically, you wouldn’t agree to a procedure based on a hunch. No, you would want whatever procedure was recommended to you to be based on the very latest medical thinking that’s been peer reviewed and that offers you the best probability of a successful recovery.
RP: Why do you believe so strongly in the value of financial advice?
MV: I think I can encapsulate it in a simple statement: good financial advice is about preventing clients making the wrong decisions at the wrong times for the wrong reasons.
RP: Can you give an example?
MV: Well, I guess 2008 is still fresh in people’s memories. What we typically see when markets are doing well is heavy inflows into the stock market, and when things start to go wrong, and they will, we see people bailing out. So that buying high and selling low materialises a real on-paper loss for those people who do it. We take very seriously the ongoing education of clients, helping them think differently about investments and how the markets work. We give them sufficient information to make informed, sensible investment decisions.
RP: What sort value do you think a good adviser adds, in financial terms?
MV: There has been some research published by Vanguard who have attempted to put a monetary value on the benefit of financial advice. They have a direct-to-consumer proposition in the US and they have looked at and compared those clients who use that against those who have been advised, and they’ve seen a figure around 3% per annum better outcome for the clients who’ve had the counsel of an adviser. There are a number of research documents that have come out that put the figure anywhere between 2.5% and 4%. Having a trusted adviser acting in your interests clearly adds value over and above DIY investing.
RP: For those who don’t understand how seemingly small percentages can really add up over time, how significant is that?
MV: Well, if we’re talking about someone who can add 3% to their investment pot on average each year, that can make tens, thousands, if not millions of pounds of difference over an investing lifetime. We’re not talking small figures here, especially with our clients, who are wealthy people. Whether it’s 3% or even 2% or 1%, the difference can be profound.
RP: Talking to you and your colleagues at RockWealth, you clearly see yourselves as much more than money managers. You’re very much custodians of your clients’ wealth, aren’t you?
MV: Yes, I remember going to the first actual proper financial planning conference in the UK. and there was an American adviser there who put up on screen an excerpt from a letter that he had received from a client that his firm had recently taken on. It read something like this: “The money I am entrusting to you represents years of hard work and sacrifice. The actions you take could impact this family for generations to come. Whilst it may be long-term business for you, it also represents the opportunity for our children and our children’s children’s education. Please don’t let us down.” That had quite a profound effect on me.
RP: What sort of response have you had from RockWealth clients to the evidence-based approach?
MV: The very first client we moved out of what was an actively managed portfolio to an evidence-based portfolio — it was a portfolio in excess of £5 million — just in management fees alone we shaved £80,000 per annum off the cost. So that very first response was ‘Wow!’”
RP: Investing: The Evidence, the documentary that my colleagues and I at Regis Media have produced for you, is now online. What would you say to people who’ve watched the videos and want to find out more?
MV: If you have an incumbent adviser, who isn’t managing your money according to the evidence, ask the question, Why? And if you’re not happy, go and talk to an adviser who does manage money on an evidence-based basis.
Have you watched Investing: The Evidence? If not, you’ll find all six videos here. The full-length documentary will go online early in January:
Part 1: Active investing
Part 2: Passive investing
Part 3: Factor investing
Part 4: Risk
Part 5: Behaviour
Part 6: Advice
Adviser 2.0 is produced by Regis Media, a boutique provider of high-quality content and social media management for evidence-based financial advice firms around the world. For more information about what we do, visit our website and YouTube channel, or email Sam Willet or Christina Waider.