British investors have flocked to DIY platforms with the coronavirus shaking global markets, but financial advisers warn of big risks
- Global stock markets have been turbulent during the coronavirus pandemic.
- Multiple UK platforms that cater to inexperienced investors have reported a surge in new accounts being opened.
- Financial advisers, who compete for business with such platforms, caution that there are big risks if investors make the wrong move.
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UK do-it-yourself investment platforms such as Hargreaves Lansdown and AJ Bell Youinvest have reported a surge in new accounts being opened by investors trying to manage their money themselves during the chaos caused by the coronavirus pandemic.
But professional financial advisers, who compete with such firms for business, are cautioning investors about the risks of going it alone, especially coming off the recent volatility in global stock markets.
DIY investors, also known as retail or individual investors, might sell at the wrong time, for example, or even start
Lisa Johnstone, the managing director of the advisory firm VWM Wealth, said DIY investing made her think of a poster she saw in the waiting room of a doctor's office that said "Don't confuse your Google search with my medical degree."
Johnstone pointed to last year's collapse of the popular fund manager Neil Woodford's multibillion-dollar Equity Income Fund, which had received investment from hundreds of thousands of DIY investors.
"The Woodford scandal is an example of why you should not pick your investments yourself from the internet or from ads in the Sunday papers," she said.
"The DIY investor sets stock in the best-buy list, whilst the professional looks under the bonnet and actually knows what to look for."
Don't put all your eggs in one basket
David Macdonald, the founder of the advisory firm The Path, said a
"The main thing for investors to consider is their risk tolerance," he said.
"The longer someone's timeline is for investment, the more they can afford to take. A portfolio should be diversified so you don't put all your eggs in one basket. Investors need to know how many different investments they should have and the various types."
For example, he said, a typical portfolio might consist of stocks and shares, bonds, and cash.
"The asset allocation is informed by the risk tolerance a client has got," he said.
Some DIY platforms do provide ready-made portfolios based on an investing goal and risk tolerance, but advisers would argue that they can build a more accurate and personal basket by getting to know the client.
Planning rather than product-focused
DIY investment platforms might focus on tax-free investing through an ISA product or push fund recommendations, but an adviser or
Johnstone described a financial planner as an accountability partner "to tease out what you and your family really want your money to do for you, to question the decisions you make and your relationship with money, and to encourage families to sit down and talk about their differences."
"They invest with a proven track record, investment experience, professional qualifications, and regulatory requirements to do it well," she said.
She added that a financial planner would have the discipline to maintain a long-term view even amid the kind of volatility in global markets from the past few months.
"It is at times like these that those who don't have a financial planner wish that they had," she said. "When the S&P index falls 34%, it is a brave and rare DIY investor that will have the resolve to leave it alone."
A long-term view also means being able to predict problems, such as decisions that might inadvertently lead to higher taxes down the road.
"A financial adviser would start with the end in mind and look holistically at a situation to think carefully about before you get into something, how will you get out," Macdonald said.
"You may find someone is a higher-rate taxpayer but has a spouse in the lower-tax band whose name it may be better to invest in."
Macdonald suggested advisers could also help clients with more niche desires like the impact investing, which his firm specializes in.
"Many investors put environmental impact and sustainability as a more important metric than outright financial performance, but it is hard to research these types of funds on your own," he said.
How to decide between DIY or using a financial adviser
Not all circumstances require a financial adviser. Holly Mackay of the investing-guidance website Boring Money pointed out that DIY platforms could be cheaper than taking financial advice, though advisers would argue that they offer extra value by helping form a plan and ensuring investors stick to it.
Boring Money has tables designed to compare the costs and reviews of DIY websites, while the adviser search engine VouchedFor features adviser ratings and customer feedback.
There is also a middle ground with robo-advisers such as Nutmeg or Wealthify in the UK and Wealthfront and Acorns in the US, which build and manage automated portfolios based on risk questionnaires that investors complete online.
"For those looking to do relatively simple tasks such as investing in an ISA and not, for example, making complex pension decisions, it can be argued that it's not worth paying for financial advice," Mackay said.
"In general advisers come into their own when it comes to complex decisions such as around retirement and pensions, or for those with more than £100,000 who feel that the costs of getting it wrong are too big to mess with."
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