Macroecono-what? Just how much knowledge do you need to be a good financial adviser?

Many independent financial advisers talk a good game but when you dig deeper it becomes pretty obvious that they have only a cursory understanding of economics and the markets.

In fairness, very few can be expected to be trained economists, but is a generic understanding of the different asset classes and the principles of diversification really enough to offer quality advice?

Saying that, a Harvard- or Cambridge-educated strategist might be paid half a million a year at an investment bank to work on asset allocation, and can still get it wrong — so why should an IFA be expected to get it right?

No one can predict the future and if you spread the risk and adapt a portfolio to your client’s age and risk appetite, you’ve surely done alright — or so the argument runs.

Now I’m certainly not arguing that IFAs need to have detailed knowledge of every single market and economy globally. That would be absurd. But it can’t hurt for them to have a grasp on the bigger picture.

In my opinion, the best, most rounded IFAs are the ones who understand the forces of the global economy and marketplace.

Is it possible, for example, for someone to give good investment advice if they don’t understand the impact quantitative easing has had on bond yields?

A standardised portfolio for an investor who says she is risk-averse is likely to contain a high proportion of bonds — but shouldn’t IFAs be worrying that the 30-year bull market in bonds is over?

After all, with the massive bond-buying programmes adopted by many central banks drawing to a close as economies recover, and the days of ultra-low interest rates numbered, fixed income assets are arguably looking dangerously overpriced.

The Bank of England owns nearly a third of the gilt market and its buying has compressed bond yields by 1%, according to some market commentators. Once inflation is taken into account, real yields are even lower, barely positive.

It looks like the Bank of England may become the first of the world’s major central banks to raise interest rates from their record lows, in all likelihood by next spring.

Institutional investors in the UK have been quick to respond to the changed outlook and sold more bond funds than they bought between April and June – but retail investors continued to pile into them. They put almost £600m into bond funds over the second quarter, according to figures from the Investment Management Association (IMA).

But how many IFAs are aware of this broader, and arguably crucial, development within fixed income — and have adapted (their client portfolios) accordingly? How many make the link between the end of QE and the impact that will have on the performance of bond funds – so-called ‘safe’ assets?

Given the vast spectrum of investment advice IFAs are allowed to give, it is perhaps not surprising that they tend to gravitate towards standardised portfolios, rather than investments tailored to the changing macro-economic – and market – climate.

But does this really constitute robust, and quality, financial advice?


13 thoughts on “Macroecono-what? Just how much knowledge do you need to be a good financial adviser?

  • Julia, as much as I respect your opinion, this article comes across as ‘adviser bashing’. Can you back up the following statement by naming the advisers who fall short, in your opinion?

    “Many independent financial advisers talk a good game but when you dig deeper it becomes pretty obvious that they have only a cursory understanding of economics and the markets.”

    You claim ‘many’ IFAs have only a cursory understanding of these important areas, so I’m sure you won’t struggle to name names.

    If you take a look at the syllabus for CII RO2 at, a mandatory exam for financial advisers as part of the Diploma in Regulated Financial Planning, you will see it specifically covers the macro-economic environment and its impact on asset classes.

    Earlier this year I sat and passed the more demanding CII R10 (you can view the syllabus at, as ‘many’ IFAs have also done, and you will see from this syllabus that it covers the fundamentals of economics applicable to investment management.

    Perhaps I can pose the following question; how many personal finance journalists have more than a cursory understanding of economics and the markets, and how many hold the relevant professional qualifications to demonstrate their competence in this area?

  • “The only function of economic forecasting is to make astrology look respectable” – John Galbraith

    Look at the words used in the article above. ‘Arguably looking’. “According to commentators” “Likelihood”.

    IFAs and Planners have to live in the real world of the clients unique and interesting circumstances, and have to make recommendations based on that. And then be held accountable for those recommendations.

    Economists – and Financial Journalists – are rewarded for speculating about a range of possible futures, and have no accountability to anyone that I can see at all.

    Whilst as private individuals we are entitled to play games with our own wealth, and guess about the future, to do so with our clients wealth would be irresponsible in the extreme. It would be rather like a Doctor guessing what the effect of a future not yet invented drug. It may or may not work, but we must treat real life clients according to what we know to be real life solutions right now. As the future changes, so will our advice. That is what reviews and the Planning process is for.

    Unlike journalists, we don’t just get to make pronouncements and go off for lunch. This about a long term relationship and we will adjust as the world changes.

    But please look back. Imagine if we had based our advice on the predictions of the past. Only 5 computers needed on the entire planet. Worldwide famine and reducing population by 1999. The end of fossil fuels by 2010.

    I am sorry to say this is yet another silly, shallow article from a financial Journalist. I wonder if anyone out there is capable of writing a serious one?

  • I agree with Phil B. as exams – including those used to asses and hire journalists etc deal in historical terms – in everything ! whilst a good relationship is ongoing and will reflect both reasonably predictable events and Black Swans.

    Our job is supposed to have changed into a service model although you would never know it from this kind of external observation.

    Even possessing a crystal ball would not give you the powers to predict events and their consequences in the geo political world we inhabit today.

    Which just makes anyone doing our job properly worth their weight in Gold – even if the price is tumbling !

  • Hi Julia
    I wonder if you could explain why you’ve chosen to publish the article. You’re not the first person to have published an article like this and there was even a similar one on here a few months ago.
    It’s a bit like going into the canteen at the Guardian and shouting “all journalists are knobs”, and then running away.
    My guess is that you have probably fallen out with your own financial adviser, and decided that all IFAs are the same – that’s not very open minded or investigative, is it?

  • Phil Wise,

    They all write to get a reaction which I guess she has done.

    Next week she will probably do the baking scandal.

    Probably neither knows or cares anything on the subjects she writes about and is focussed on keeping her Editor happy and herself in line for the next promotion – just like Civil Servants, Regulators and most other unaccountable people who live off other peoples work.

    Yes you are right I don’t think much of any of them !

  • A good article will cause debate and strong language will rattle people. Working for insurance companies and developing a direct to consumer platform clouded my judgement of financial planners.

    Working in the industry for the last three years has changed that, clearly like any industry you have good people and bad.

    The service offering of a financial planner is important as is the way this is articulated. Fundamentally the relationship is about trust and reassurance especially during the more volatile times.

    The point Julia makes is interesting because I agree that financial planners should have an understanding on the economic picture. It is not difficult to do but it is challenging for a number of reasons. Firstly to understand what is happening you need to dedicate time, the financial planner can do this but it could take them away from what they do best or they could hire someone to do it but this costs money.

    Secondly the FCA clearly state asset allocation models and continue to argue that cash and bonds remain the lowest risk asset class. The reality is that cash has been a negative asset class for 5 years plus and as for bonds well that’s another story.

    I am fortunate because I have been employed to study what is happening in the market place, run portfolios and communicate with clients. Directly I make no money for the business but indirectly it is this that provides the clients with reassurance that we are working for them and with them.

    Articles like this challenge us and make us feel uncomfortable, journalists are paid to do this. There are things we can say about their industry which would make them uncomfortable but often digging around a bit we can find something that challenges us.

    For the record Julia we haven’t held developed market bonds for over two years, and have opted for other investments to control volatility and drive growth. This goes against what the FCA tell us to do…….

  • Hi George,

    Thanks for a thoughtful addition.

    Whilst a fan of debate and strong language in general, I find it difficult to be attracted to something that chooses insult rather than content.

    Can I refresh you about the supposed points to which I and others took exception?

    You don’t have to look hard. Her opening sentence dismissed all IFA’s as ‘Talking a good game, …..with a cursory understanding…’

    Now, what debating point is that designed to subtly elicit?

    She then sets up a number of possible future scenarios, in a fairly scattergun way, any, all or none of which may come to pass, with a wide range of possible effects on a particular Clients portfolio.

    She then rather patronisingly dismisses what we – in her opinion – do, and questions it’s value.

    Thank you for that, but again, I fail to spot the ‘debating points’ raised?

    So I must rather aggregate her article with other recent patronisingly simplistic journalistic efforts. Such as the labelling of Advisers as ‘Robo-Advisers’ because – gasp of horror – we use software to help us diagnose client tolerances and concerns. Remind me to point this out to my Doctor, sorry, Robo-Doctor, when he next takes my blood pressure on a *gasp* machine.

    Debate? I’d love some debate. I’d love to actually discuss and think through some of the real issues raised by technology and economics in relation to our clients future needs. Instead we get dismissive, patronising little hand grenades, that no author can ever be bothered to even follow up to.

    We are listening and engaging. Are they?

    • I don’t disagree with your comments.

      When journalists, bloggers etc write there has to be a train of thought. What Julia writes is interesting but actually perhaps as sometimes I am pron to do she tries to include a number of trains of thought when perhaps they can be spread across a number of blogs.

      I just had a scan of the article and without spending more than a minute on it – there are at least three areas of debate.

      Firstly should financial planners be more aware of the economic environment and what this means both in the short and long term, should financial planners follow standardized portfolio theory or adjust this to reflect a changing environment and should financial planners challenge the FCA on the use of bonds (and cash) for low ‘risk’ investors. I am sure you can identify more.

      I often get frustrated when I read what journalists write because I wonder what qualifications or skill they have to make the judgements they make. Sometimes I look through that and can see a train of thought. WIth Julia’s article I could see a train of thought and it has sparked debate. The style of writing is probably what makes it challenging and if she did try to split out the different ideas would they provoke the same response. I don’t know.

      Anyway who am I to comment, I have only been working in financial planning for three years!!!!

  • Good to get your thought-provoking responses.

    Respondents are coming up with a couple of incompatible lines of defence here.

    One is that knowledge of economics is useless for independent financial advisers – that economic forecasting is more disreputable than astronomy while IFAs have to live in the real world.

    The other is that the qualifications many IFAs have obtained do have an element of economics. Is that chunk of economics beneficial or useless for IFAs ?

    Put it another way, if a top City economist lost his or her job and started out again as an IFA – is the view they would start with a strong advantage or no advantage at all ?

    Just asking – before I return to reporting on the great baking scandal !

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  • Hi Julia,

    Thanks for engaging, so much easier to debate in conversation, I find

    Just a couple of corrections:

    At no point did I or anyone else claim that we DO NOT need to know anything about economics. As a Chartered and Certified Financial Planner, that would be an astonishingly foolish thing to say!

    What I tried to gently point out is that 32 years of experiance and at least a reasonable technical background has shown that economic forcasts are, at best, variable in their accuracy, and are thus flawed instruments to base our Advice to clients.

    So we see them. Understand them. Look at the evidence. And then give advice. That Advice may not accord with the latest ‘flavour of the month’ economic proposition. History tells us that most of these have very short lives in any case

    As Advisers we are rarely, if ever, trying to shoot the lights out and maximise clients potential gain if theory X and Y both turn out to be true. More often we are protecting the clients wealth if, as is more common, what if theory X and Y both turn out to be complete nonsense. Things are kept under review

    The Astology analogy was Galbraiths. Is he wrong?

  • Almost laughable article! Why we bother replying is an interesting question and tells us more about why we are IFAs than anything else.

    Julia concentrates on just one aspect of advice namely the macro economic effects on our investment advice. MPT (whilst not perfect) and asset allocation should not rely on macro economics – or put another way, IFAs should not and cannot in practice actively manage clients investments in quite the way she is suggesting. To change a client portfolio means getting them to agree, a full factfind, research etc (assuming you don’t have discretion). Adjustments tend to be done at the annual review but on what basis? Her view on bond yields and prices, QE effects etc are just that -her views. They may be right or they may be wrong but I wouldn’t like to justify them to my clients.

    Clients have aims and needs and if we can help them achieve those aims and needs more efficiently then we are doing our job. If Julia is such a wiz, then let her pass the advanced exams and get in front of (sometimes) awkward clients. Let her deal with the FCA and the PII issues on behalf of IFAs and free up my time to help my clients.

    Have a good weekend everyone and forget this nonsense she wrote!


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