If you’re anything like most investors, both these things will be true:
- You spend almost 100x as much time watching TV than you do on your household finances, and
- You’d rather sit in rush-hour traffic than rebalance your portfolio.
Source: A Wealth of Common Sense
You may also believe that real estate is likely to provide higher returns than stocks, and that gold is likely to provide similar returns to stocks, but with much less risk:
The chart above shows the perceived risk and return for different asset classes on the left and the true risk and return on the right. Note the odd position of gold and real estate in the left-hand chart. Not only do private investors believe that real estate is superior to equities, but they also believe that gold has about the same returns as stocks but is much less risky. Source: Jo et al. (2022)
Most investors, unsurprisingly, find household finances boring, don’t spend much time on them, and aren’t interested in learning about investing.
Fair enough – it’s not everybody’s cup of tea.
There are some weirdos like me who love this stuff, and spend far more time on it than average. But we’re in the minority.
For those of us who are passionate about investing, there can be some real benefits to managing your own money. So many benefits that my next post will be all about them.
But for the vast majority who aren’t interested in investing (and even for many of us who manage our own money), some form of outsourced investment management will almost certainly be the best option.
This article will walk through the various options available for outsourcing, and when’s best to use each of them.
- The spectrum of outsourcing
- When to manage your own money
- When to use a multi-asset fund
- When to use a robo-adviser
- When to use an investment manager
- When to use a financial adviser
The spectrum of outsourcing
There are roughly three stages on the outsourcing spectrum – DIY investing on the one end, multi-asset funds in the middle, and fully outsourced on the other end:
With DIY investing there’s no outsourcing at all.
You do your own research, and you pick your own funds and/or stocks. Usually this is done through an investment platform like Hargreaves Lansdown or Freetrade. Nobody else is involved at all. All your investment choices are up to you.
One step along the spectrum from DIY investing comes the multi-asset fund. These are single funds which hold multiple asset classes – usually stocks and bonds, but many also include other asset classes like property and alternatives. Examples include target-date funds, where you pick the fund whose date corresponds to your intended retirement date, and LifeStrategy funds which have a stated bond/equity split and you choose the one which is appropriate for you.
This is DIY in the sense that you’re still in charge of selecting which multi-asset fund is right for you, but has elements of outsourcing in that you’re not responsible for the ongoing maintenance of the portfolio. All the rebalancing and risk management is done for you.
Popular examples include the Vanguard Target Date and LifeStrategy range.
Then you get to full-blown outsourcing. There are three options here, all of which require minimal investment knowledge, and no initial or ongoing portfolio maintenance.
Firstly, you have the robo-advisers. These are the likes of Nutmeg, Wealthify and InvestEngine. They’re 100% online, and all you need to do is sign up on their website, answer a few questions, and transfer over the money you want them to manage.
Secondly, you have the investment managers. They come with a higher level of service, including face-to-face meetings and client events, but have high minimums and are much more expensive. They also are die-hard active managers, as opposed to robo-advisers which tend to adopt a more index-tracking philosophy.
These include the likes of Rathbones, Quilter Cheviot, and Schroders.
Lastly, you have the financial advisers. Although they’ll manage your money for you, financial advisers tend to be the most expensive option, due to the additional layer of fees involved – the financial adviser will often invest your money with an investment manager. A financial adviser is the person to visit if you have broader financial planning needs above just money management.
I’ve written a few articles on financial advisers recently, including: The 8 reasons to hire a financial adviser and How to choose a financial adviser, and Do financial advisers add alpha?, which give a pretty comprehensive view on when and how to use them.
I’ll go through each option in turn, providing some thoughts on which type of investor would be best served by each form of outsourcing.
When to manage your own money
Looking a bit more closely at the far end of the investment outsourcing spectrum, we can see that DIY investing has a spectrum of its own.
At one end, you have DIY active investing. This is the classic stock-picking approach, where investors try and outperform the market.
I don’t usually deal in absolutes on this blog. With investing there are no iron laws, and most truths are extremely mutable. But active investing as a DIY investor is a bad idea.
We saw in my last post on ‘Do DIY investors underperform?’ that the chances of DIY investors outperforming the market are miniscule. And what’s worse, the in the highly likely event of underperformance, the magnitude of the underperformance can be excruciatingly painful. The odds are stacked heavily against you, and the penalty for failing is extremely high.
As I’ve said many times on this blog – we all like to dabble in active management (including me). And there’s nothing wrong with that. It just needs to be kept as a small fraction of your portfolio with predefined rules around it. What’s not a good idea is trying to actively manage the core of your portfolio.
At the other end of the DIY spectrum, we have DIY passive investing.
This is a far more sensible approach to investing than DIY active management, and is much more likely to generate higher returns over the long run.
It involves buying a simple combination of global market index-tracking funds (or just one fund if you like to keep things super simple), and a similarly simple bond fund. For those looking at what these funds should look like, have a look at my posts on ‘The Best Vanguard Index Tracker Funds for UK Investors’ and the ‘The Best Vanguard Bond Funds for UK Investors’.
A couple of problems come with DIY investing though.
It requires a base level of knowledge before you can dive in. You don’t need to be Warren Buffett or have your own Bloomberg terminal – but you do need to know the basics.
And figuring out the mechanics of DIY investing can be daunting for those with no experience. How do you actually “invest”? What’s a platform? Is that different to a broker? When should you be investing? Is now a good time to invest? Should you invest all at once, or drip feed? How much should you be holding in equities versus bonds? What do you do when the market crashes? Which funds should you buy? How often should you rebalance? When should you rebalance? Which tax wrappers should you be using? How do you avoid getting lumped with a huge tax bill?
It’s now far, far easier to find the answers to these questions than it used to be (hint hint), but it can still be pretty overwhelming for investing newbies.
And even if you have all the answers to all these questions, taking your investing life into your own hands can still be incredibly daunting. What if you still get it wrong? What if there’s something important you haven’t thought of?
You don’t want to be investing your life savings without being 100% confident you know what you’re doing. And for many people, it’s just not worth the risk.
A further important drawback of DIY investing, even for the more experienced investors, is that because there’s nobody else involved in managing your money, it’s very easy to make bad decisions.
All investors (and I mean all) fall victim to any number of behavioural biases. I’m talking performance chasing, loss aversion, herding, anchoring, confirmation bias, overconfidence bias, and many more. It’s impossible to avoid all of them throughout your investing lifetime, and having no circuit-breaker between you and your money means it’s incredibly easy to shoot yourself in the foot by tinkering with your portfolio. Behavioural biases can be somewhat mitigated by choosing only to invest in diversified index-tracking funds, but there will always be the temptation to adjust your asset allocation during a market crash, or dabble in too much stockpicking.
But for those who are confident enough in their understanding of investing to go it alone, there are plenty of benefits of doing so. The positives of managing your own portfolio are many – too many to include here. Which is why I’ll be dedicating the next post to why (certain) investors should be managing their own portfolios.
I’ve put together a little graphic summarising the main differentiating factors between the various methods of outsourcing, which I’ll be updating at the end of each section. Weirdly enough, I’m not a graphic designer:
When to use a multi-asset fund
The amount of learning and ongoing admin required for DIY investing isn’t for everyone.
So let’s move along the outsourcing spectrum, to the world of multi-asset funds (aka “fund-of-funds”).
These are single funds which hold multiple asset classes – usually stocks and bonds, but many also include other asset classes like property and alternatives.
One famous type of multi-asset fund is the target date fund (TDF). This is the ultimate in simplicity – all you do is pick the one whose date matches your planned retirement date, and the asset class mix in the fund will automatically adjust itself based on how long you have left till retirement. It starts off mainly in equities, then gradually increases its weight in bonds as you approach retirement.
TDFs require less management than pure DIY investing, as you pick one fund and leave it. With TDFs, you don’t need to worry about figuring out your risk profile, asset allocation, rebalancing rules, diversification, or fund selection – the fund does all that for you. You just pick your retirement date.
You will, however, still need to know how to buy a TDF, when to invest, tax efficiency, and how much you can invest.
These multi-asset funds appeal to investors who want to keep things simple and are willing to pay slightly more for the reduced administrative burden and peace of mind. But they do come with some drawbacks, which I’ll cover at the start of the next section.
Popular examples of multi-strategy funds include Vanguard’s target-date fund range, as well as their LifeStrategy range, which hold a constant equity/bond split, varying from 20% equity/80% bonds to 100% equity.
When to use a robo-adviser
These multi-asset solutions aren’t perfect, for a few reasons:
- With target date funds, you need to know retirement date (and who can really know that?)
- With target date funds, the risk profile might not be appropriate for you. Someone looking to retire in 40 years will automatically be allocated a fund with almost everything in equities. This sounds reasonable for most investors, but if they’re a naturally cautious investor who isn’t able to stomach heavy losses, then they should be in a lower risk strategy regardless of their retirement date. Not everyone of the same age has the same risk tolerance.
- For the non-TDF multi-asset funds (like the Vanguard LifeStrategy range) you need to know your own risk profile. This isn’t easy to assess yourself. Sadly most people tend to over-estimate it, as the temptation is to invest in the fund which has had the best past performance. They then realise too late – during a market crash – that they’re holding too much in equities. This is the absolute worst time to figure out your correct risk profile.
- Investors also need to periodically re-assess their own risk profile. Your circumstances will change over time, and this will affect your portfolio. Investors inherit money, get divorced, buy a house, have kids, or receive a taste of volatility through a market crash. All of these (and may others) impact what your portfolio should look like. DIY and multi-strategy investors rarely revisit their initial risk profile, leaving it out of date and therefore open to the possibility of being invested in an inappropriate portfolio.
- You’ll likely be buying a multi-asset fund through a broker, and customer service at brokers is famously terrible. I’ve yet to hear of any brokers whose customer service is adequate, let alone a selling point.
- Multi-asset funds won’t consider tax efficiency for you. Buying a TDF means you’ll have to consider 1) which tax wrappers to use and 2) how to mitigate CGT on your own.
- Most multi-asset funds are tied to one fund house. For example, Vanguard’s TDF and LifeStrategy ranges only invest in Vanguard funds. You can’t chop and change parts of the portfolio if you find preferable alternatives elsewhere.
Enter the robo-adviser.
These are the likes of Nutmeg, Wealthify, InvestEngine, and Moneyfarm.
They’re just as simple as using a multi-asset fund in that you don’t need to worry about figuring out your risk profile, asset allocation, rebalancing, risk management, fund selection or diversification.
Their first advantage over a multi-asset approach, though, is that they do a better job of gauging your risk profile. Rather than simply picking a retirement date, or having a finger-in-the-air stab at how much equity risk you reckon you could stomach, all robo-advisers will ask you to fill out a ‘risk tolerance questionnaire’. This is a short (10-20 question) survey which asks you questions like “How long are you looking to invest this money for?” and “What would you do if your portfolio fell by 30%?”
Now these surveys aren’t perfect – studies have shown that a person’s answers to these questions can vary if they take the test multiple times. Their answers are skewed by their current mood, so it won’t be a complete guarantee of ending up with the correct asset allocation.
But they at least force investors to consider their reaction to losses, and so are a better option than simply guessing.
Another benefit is they ask you to repeat this exercise once a year. Because you’re periodically considering your circumstances through the questionnaire, this ensures your portfolio’s asset allocation remains appropriate.
Because they’re a fully-outsourced option, robos also have the advantage of requiring the least amount of time in terms of ongoing portfolio maintenance. They also require the least amount of investing knowledge.
Someone with zero prior investing experience can sign up with a robo-adviser, be placed into an appropriate, cheap, diversified portfolio, and never have to spend any time on managing their portfolio or worrying about whether they’re investing in the right things.
That’s a pretty big plus in my book.
And because the robos are technology-driven, innovative, and ambitious companies, their customer service tends to be excellent. Granted my data here is only anecdotal, but I’ve heard only positive things about the customer service from all the major robos, and almost entirely terrible things about the customer service from the major brokers (I’m looking at you, Vanguard).
Robos are also independent, meaning they’re able to select funds from any provider they want. If Vanguard start hiking the charges on their funds (unlikely, but possible), or another fund company undercuts them (much more likely), then the robos are able to switch to cheaper funds from other providers.
If being able to monitor and manage your investments via an app is valuable to you, then that’s another tick in the robo column. They all have super-slick, intuitive mobile apps which make portfolio management incredibly smooth. Granted, we shouldn’t be checking our portfolio balances daily, or making lots of trades outside the monthly portfolio contributions, so nobody really needs to have instant access via an app. We’re all long-term investors, after all. But although it’s not totally necessary, for many it’s a ‘nice to have’ – especially when compared to the clunky offerings from the DIY brokerages, many of whom don’t even offer an app.
One final, but important point on robos. It’s worth double-checking which strategy you’re signing up for.
Many robos, despite using cheap passive vehicles like index-tracking ETFs and index funds, will be very active with their asset allocation. While this is preferable to being active with asset allocation and also using expensive active underlying funds, they’re still acting as an active manager by over/underweighting certain geographies and sectors. And we all know the stats on active management.
When to use an investment manager
Alongside robo-advisers, investment managers are also a fully outsourced option.
Here you have the dedicated investment managers (aka discretionary fund managers or ‘DFMs’) – the likes of Rathbones, Quilters, and Schroders – as well as the investment arms of every high-street bank under the sun.
They have some of the advantages of a robo-adviser, in that they’ll do all the risk profiling, portfolio construction, and admin for you. You can leave it all to them.
But with a DFM, it’s all about the service.
And if you have enough cash to invest (I’m talking £1m+), then you do get great service. If you enjoy being taken out to lunch, sporting events, networking dinners and the like, then an investment manager is the way to go.
But you’ll be paying a heavy price for that service. Most investment managers will be charging 0.75% as a minimum – and that’s before you even get into the underlying fund costs. All-in costs will be anywhere from 1.5%-2.5%. And as we know, fees are the best predictor of future performance.
Speaking of underlying fund costs, DFMs will never offer passive solutions.
To them, passive investing is the enemy. It’s the grim reaper coming to eat their bonuses. So you’ll be investing in a portfolio which has both an active asset allocation and uses active funds. Which is why their performance is so poor.
Occasionally a DFM will offer a “passive” solution which populates their active asset allocation using passive funds. But you’re still likely paying a higher price than the equivalent portfolio from a robo-adviser.
To be honest, I struggle to come up with reasons why investors these days should be using an investment manager.
I suppose if you really value meeting someone face-to-face to chat through your portfolio, or you want to speak to someone about what they think’s going to happen in markets then a DFM is the way to go.
But given how expensive they are compared to the alternatives, how disastrous high fees are for long-term returns, and how poor the track record of active managers is, I struggle to believe the occasional in-person meeting is worth the cost.
NB: One final piece of advice to finish this section – don’t invest with a bank.
I’ve seen plenty of portfolios constructed by banks, and every single time they’ve been awful. I’ve also known many people who work at major banks, and understand why they’re awful. The conflicts of interest at banks are horrendous, and they’ll fill your portfolio full of in-house funds before you can say “double-charging”. Just don’t do it.
When to use a financial adviser
Lastly, we have the financial adviser.
I’ve already written a couple of related posts on this, so here are the 8 reasons to hire a financial adviser, the answer to whether financial advisers add alpha, and how to choose a financial adviser.
Despite my negativity on the value of investment mangers, financial advisers do have the opportunity to add real value.
As I detailed in my previous articles, advisers can be hugely beneficial in sorting out your financial life – especially for things like retirement planning, estate planning, and tax management. This is especially useful if you’re not interested in personal finance, or have a messy financial life.
Given this article is purely focused on investments though, I’ll be focussing on their investment capabilities.
One big plus for financial advisers is that they’re independent of any investment managers or fund managers. It means they’re able to invest their clients’ cash in passive investments if that’s what the client wants. But even if you tell your adviser you want to go passive, there are still relatively high fees involved. The adviser will obviously have to take their fee for managing your money, and they’ll also be investing your money through a platform, which also charges a fee.
It’ll almost always be cheaper to use a robo-adviser or multi-strategy fund compared to an adviser.
Sadly, the default position for most financial advisers is to put their clients’ cash into a portfolio managed by a DFM (aka an investment manager). Watch out for this. It means you end up paying the adviser, the investment manager, and the underlying fund managers used by the investment manager – a triple whammy of fees.
Here’s a nice chart I put together from an earlier post on fees, illustrating the brutal impact of fee layering:
Obviously the levels of fees vary. Many advisers are able to charge low fees and invest in passive vehicles. In which case, that could be a great option, and can in some instances be cheaper than using an investment manager. But once the fees for an adviser’s investment management services (remember, we’re not talking about financial planning here) get to over 1%, then you should really be considering whether it’s worth taking one of the other outsourcing routes I’ve gone through in this article.
Overall, financial advisers are a slightly different kettle of fish to the other outsourcing methods, given their main way of adding value is through broader financial planning rather than investing.
If you’re considering outsourcing your investments, it’s only usually worth outsourcing to a financial adviser if you either have other financial planning needs, or you really value a face-to-face service. DFMs also offer face-to-face service, but usually with higher minimums.
Managing your own investments isn’t for everyone.
Yes, it has its benefits – which I’ll dive into in my next post. But it requires more reading, learning, and administration than handing your cash over to somebody else to manage.
And the act itself of outsourcing comes with a few benefits.
It creates a circuit-breaker to stop you from making bad decisions driven by your behavioural biases. By outsourcing your investments, you’re outsourcing your self-control.
Outsourcing also means you have no admin to deal with, which is always a blessing. It buys you more time to spend on things you might find more enjoyable than working out things like when and how you need to rebalance.
On the downside, outsourcing comes with a higher cost. And given we know that fees are the best predictor of future returns, you should be extremely wary of paying too high a price for the increased convenience of outsourcing.
In terms of performance, it’s impossible to say whether outsourcing or DIY will perform better. It depends on the individual, the extent to which outsourcing is used, and the provider of the outsourcing service.
If you’re keen to learn about investing, don’t mind dealing with the occasional bit of portfolio admin, and feel confident in your own ability to manage your own money, then go ahead and DIY.
But if you are looking to outsource, make sure the fees are low, and make sure your manager adheres to an index-tracking investment philosophy (you’ll note that this rules out pretty much all investment managers and financial advisers, which is one of the main reasons I prefer robo-advice as a route for outsourcing).
If you hate admin or aren’t confident in managing your own money then either a multi-asset or robo-adviser solution might be for you. These are both an excellent middle-ground which combine the benefits of low-cost investing with the behavioural benefits, reduced stress, and reduced admin of outsourcing.
For new investors who just want to get started, I’ll almost always recommend dipping their toe into the market using a robo-adviser. Although a Vanguard LifeStrategy fund is also a great option, the robos have the added benefit of a) risk profiling software (which is particularly important for new investors), and b) much better educational resources and user interfaces. They can take an investor with no investment knowledge, who has no desire to learn about investments, and who doesn’t want to pay any attention to their investments whatsoever and they can create an appropriate, cheap, diversified and overall strong portfolio for them in under 10 minutes.
If, on top of the benefits of robo-advice, you really value looking your manager in the eye, then either an investment manager or financial adviser might be for you. But be warned that this level of service comes at a high price. Remember, the difference between paying a 2% fee and a 0.3% fee is an extra 92% in your portfolio after 40 years.
Hopefully this post has shed some small piece of light on the options available if you’re looking to outsource your investment management. As you’re reading a DIY investing blog, I don’t imagine that’s many of you. But feel free to pass this post on if you know someone who’s weighing up their options.
I’ll finish with this definitely-not-created-in-Excel table, which provides a pretty good summary of the differences between the different outsourcing options available: