In a world of endlessly available information and multiplying investment options, consultants can help investors make truly informed decisions.
“Scientia potentia est.” This aphorism – more commonly known today as “Knowledge is power” – is commonly attributed to English statesman and philosopher Francis Bacon, who coined it in his book Meditationes Sacrae and Human Philosophy, likely alluding to the influence and power that flow from having and sharing knowledge. Bacon died more than 360 years before the internet was made available to the public, so could scarcely have imagined the staggering volume of information that is created and transmitted every day.
Nowhere is that more true than in the world of investing. Investors need information to make smart decisions. Investing on gut feel, theoretical assumptions or common beliefs can help to expedite the decision-making process, but this is not a reliable strategy – quality decisions require reliable data and robust analysis. However, the sheer amount of investment data available, from graphs and charts to headlines, emails and endless automated market analyses, creates a serious risk of information overload.
Deloitte found that the new generation of retailer investors – spurred by the socioeconomic changes of the pandemic, a proliferation of easy-to-use apps and the gamification of investing – has a tendency to rely on social media to gather and process investment information. While social media presents a convenient avenue to access collated information and share strategies, there is also a great deal of biased advice and misinformation on these platforms, presenting risk for investors who don’t know any better or fail to perform further research.
Don’t believe everything you hear
Investors will also find themselves bombarded by investment managers with marketing dressed up as advice. While it’s tempting to believe claims that their investment strategies can consistently beat the market, the facts unfortunately indicate otherwise. “Investment managers, and more specifically equity fund managers, claim superior returns over various periods, but when you objectively analyse their track records, the majority underperform the markets,” explains Braam Bredenkamp, financial advisor at GraySwan. The S&P Indices versus Active Managers, which charts how well active fund managers perform, found that more than three-quarters of them underperformed the S&P 500 in 2022.
Couple this with an ever growing and evolving diversity of investment vehicles, and things get really complicated. While South African investors might be familiar with the relatively limited range of local investment options, if they choose to move money abroad into a diversified portfolio – increasingly essential with the economy in such a state of flux – the options become myriad, with more than 50 000 options from which to choose. This adds an overwhelming degree of complexity, making it even more difficult for investors to cut through the noise.
A study published in the Journal of Behavioral Finance found that people with a low level of financial knowledge were most likely to suffer from information overload. A combination of three factors – the number of investment options, the similarity of these, and how they are displayed – made study participants more likely to opt for the default option when choosing defined contribution retirement plans, effectively abdicating decision-making responsibility by not really making any decision at all. Investing in this way often results in investments that are too high or low in risk.
Navigating the complexities
With so much information available and so many options to choose from, it’s hard to see the wood for the trees. This is where independent investment consultants come in, playing a crucial role in empowering investors and guiding them through the complexities of the modern market, says Gregoire Theron, Chief Financial Officer at GraySwan. “Increasing complexity, endless global investment opportunities and new regulations are driving the demand for independent investment consultants who can provide a high-conviction and institutionalised offering backed by proprietary research and full transparency of the numbers, the costs and, of course, the tax.”
One of the keys to formulating an effective investment strategy is understanding your personal financial needs. Independent consultants recognise that no two investors are the same, and thus form deep, personal relationships with their clients in order to build an appreciation of these needs. Moreover, not being tied to any particular group of investment products gives these consultants the freedom to wed personal understanding to a personalised investing approach. From retirement or estate planning to asset management and portfolio diversification, an experienced and knowledgeable consultant is an invaluable resource for investors.
Transparency is key to this relationship, with independent consultants typically adopting a fee structure based on a percentage of assets managed. Aside from being straightforward and easily comprehensible, this provides the consultant with an incentive to grow their clients’ money – it’s a win-win situation. This makes an independent investment consultant more than just a service or a resource; they’re a partner on any investor’s path to financial independence and sustainability.
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