Are you paying someone to lose your money?

By Luke Cummings, Harvest Lane Asset Management

February 08 2017
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Advisers may advertise their past results, but their promises of high returns often aren’t worth the paper they’re printed on.

Luke Cummings, Harvest Lane Asset Management

The fact that the financial industry is able, and required, to use disclosures such as ‘past results are no guarantee of future performance’ has always perplexed me.

On one hand, I understand the logic. It’s meant to alert a potential investor to the fact that the results achieved in a particular year or over a number of years may not continue. On the other hand, I question whether this disclosure protects an investor and helps them to make an informed decision or whether it’s simply used by the finance industry as a ‘get out of jail free’ card.

Say, you employ the services of an adviser who has achieved stellar results over the past five years, and the following year you discover that you’ve lost a significant amount of money using their services. When you call to find out why their performance has changed so dramatically, they provide you with the standard line, “Market conditions have changed and past performance doesn’t guarantee future returns”. How does that assist you in making a better decision?

We all know that market conditions change but isn’t that why you pay for a professional service? Aren’t you paying professionals to adjust to changing market conditions and to make money, or at the very least protect what’s been invested, irrespective of market conditions? To add insult to injury, you’re also likely being charged fees for the privilege of having your money managed and lost. One thing is for certain, it doesn’t do anything to improve the reputation of the industry as a whole or help investors to determine who to trust with their hard-earned money.

Imagine if you built a house using a reputable builder who had a long reputation of building quality houses. After a year, your house collapses. When you call them to complain they say, “Sorry, our past construction performance is no guarantee of the future quality of our work”. Would you accept this? Of course you wouldn’t. You would be taking them to court and suing them for damages and compensation. You paid a professional to build you a quality house and you should therefore get what you paid for. In the financial world, however, getting paid for poor advice and poor results is totally acceptable.

I believe this is one of the biggest faults in the financial industry and one that needs an immediate overhaul. The fact that a professional providing you financial advice can lose your money and still charge you a fee for the privilege is a sad reality. Anyone can lose money in the market, but paying for professional advice is supposed to prevent this from happening or at the very least minimise the probability of it happening. What consequences do financial advisors and fund managers face if they don’t make you money? Currently, the answer is very few, if any.

I’m not suggesting that all professional brokers, traders, subscription newsletters or anyone else that offers financial advice should always make you money. That’s unrealistic. I do believe, however, that you shouldn’t have to pay for poor performance.

If a professional can’t make you money, they shouldn’t demand a fee. This would have the additional benefit of ridding the industry of a large number of unqualified people who shouldn’t be providing financial advice in the first place. Ask yourself how long someone would continue to be employed if they weren’t making any money for their employer, either directly or indirectly. I suspect not long. This should be the same for the financial industry.

Luke Cummings, managing director, Harvest Lane Asset Management

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