Advisers need to analyse a client’s attitude to risk

ONE of the questions we are most frequently asked as investment managers is what is the minimum amount of money on which we are prepared to advise.

Some financial advisers are on record claiming they would not get out of bed for someone with less than £500,000 to invest. That said, there is a minimum sum below which a prospective investor would be advised not to consider certain “conventional” investments, such as a portfolio of shares.

That is not because the manager does not believe it will generate sufficient returns to justify the time, and indeed risk, involved but because of the difficulty of ensuring sufficient diversity of asset exposure.

But the problem with risk is that it is not a constant. Not that long ago, holders of Greek, Italian, Spanish and Portuguese quoted sovereign debt could sleep easy in their beds. Similarly, equity investors in Allied Irish Bank were of the view that they were aboard one of the best ways of capitalising on the booming Celtic Tiger economy.

Buying into UK government bonds has a risk dimension today, even if one assumes that the mob is not imminently likely to be marching on Westminster. Inflation, even by the government’s own grudging admission, is running at something close to 4 per cent. That means a conventional UK government issue is generating – net of tax and of the eroding impact of inflation – a negative return in terms of purchasing power.

By contrast, those who were prescient enough to have taken the “risk” and bought ASOS or Tullow Oil three years ago would have prospered, while shareholders in Royal Bank of Scotland and BP, regarded then as the epitome of financial probity and security, have suffered badly both in capital and income terms.

Few investors are overly concerned about the day-to-day movements in the value of their investments, although they are aware of the threat of, as it is now described, “capacity for loss”.

Instead, investors are looking for a platform which will secure a reasonable and growing income stream over the medium term.

Capital performance is, for most of them, secondary – an important dimension in protecting the real value of the portfolio, of course, but a less immediate objective. To achieve this sensibly, a portfolio must incorporate a degree of diversification, investing in a range of industrial sectors and international economies. This is simply not possible with less than, arguably, £50,000, and even then this might result in a list unduly concentrated on a limited number of investment classes, with a greater degree of risk as a result.

One solution, of course, is using collective funds, be they closed-ended (ie investment trusts) or open-ended (such as unit trusts). However, these are not panaceas. Everything has a risk. There is a risk that Gordon Brown or Sarah Palin might be elected into power. There is a risk that you might lose your job, or your house might burn down, or your partner might run off with the neighbour, but few live their lives in the dreaded anticipation of such an event.

No financial adviser can impose a risk dimension on anyone. A would-be investor must adopt an approach with which they are entirely happy. If that involves burying cash or the gold bar under the plum tree in the garden then that is the right course of action for them.

But advice from a reputable source is the key. Investing is a long-term process, not unlike financial gardening. Once the landscape has been laid out to the investor’s satisfaction, the adviser should then attend to his charges, pruning back on the over-vigorous and digging out the inevitable failures, but this should not entail ploughing up the whole thing every year and starting again.

Hopefully, like a garden, it will bloom. Today most financial advisers operate on an ad valorem fee system, which means that they too will benefit if the portfolios with which they have been entrusted flourish.

This is a powerful incentive, allied to the essential need to understand a client’s objectives and, of course, risk dimension.

The answer to “the minimum amount” question is to seek a meeting with a reputable investment adviser and see what is proposed.

Bryan Johnston is a senior divisional director at Brewin Dolphin