The role of financial advice

1. Making sense of the wide range of products available

   Most people do not make the time to research even the most well-known investment managers in their home countries. South Africa now has 39 distinct unit trust management companies offering 765 funds for individuals to choose from. Internationally, the numbers are much higher. Logically, the more of these funds and managers you know of and the better you understand their methods and track records, the better your chance of picking the best. But making sense of that much choice is hard. Using an independent (this is critical) adviser to research and propose funds is a good way for investors to access a broad range of possibilities while avoiding complexity. Maintaining a relationship with him or her over time should also help to make sure that your choices are reviewed appropriately.

2. Choosing the right investment vehicle

   Over the years, successive governments have encouraged individual savings in South Africa by allowing investors who put money away for a long time to pay less tax on their savings. Investment "products" like retirement annuities, preservation funds and endowment policies all have built-in tax breaks in return for a lock-in. These examples are easy to understand if you have the time, but some of the consequences of your choice of investment vehicle are not always obvious and with regular changes in legislation this is an area in which even the most sophisticated investors tend to seek professional advice. On top of fund choice, good advisers therefore add value for their clients in choosing the right product for a particular set of circumstances.

3. Resisting behavioural biases and emotional responses

   Ben Graham wrote: "The investor?s chief problem ? and even his worst enemy ? is likely to be himself." Although it may not sound like it, the academic understanding, expertise and experience investors need to make sound financial decisions is the easy part. It is the behavioural biases that we are all subject to that the majority of investors struggle to identify and manage.

   The average investor in each of the Allan Gray funds that include equities has not achieved the return of the funds themselves; in other words, they have bought and sold our funds at the wrong times. Some investors would have had logical reasons to disinvest, but these would not have explained the systemic underperformance of investors relative to the funds ? the effect would have been mixed, with the average investor achieving the same return as that of the fund. The only explanation we can find for the underperformance of investors relative to our funds is that behavioural biases (e.g. favouring recent performance over long-term performance, or reacting fearfully after a big decline) persuade them to buy and sell at the wrong times.

   An independent adviser is subject to the same biases as anyone else, but a good adviser is aware of his or her biases and is able to coach a client through dangerous times.

4. Applying a disciplined savings and investment process

   In order to ensure the combination of action and rigour in decision-making, successful investment requires a process of some kind and for this process to be followed with discipline over time. This is true for large professional investment firms and for individual investors saving for retirement.

   In truth, people should not need an adviser to consider returns, risk, time horizon and cost before making a decision. But many advisers will admit that they add a large part of their value in simply helping their clients to be disciplined about managing their finances and about making, and acting on, savings and investment decisions.

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