RockWealth: Why we adopted evidence-based investing

I’m really excited to announce the imminent launch of a landmark documentary about investing. Called Investing: The Evidence, it’s 45 minutes in length and explores what peer reviewed and time-tested academic research tells us about how to invest. Specifically targeted at a UK audience, it also explains the benefits of using a financial planner. We’ve broken the film down into six stand-alone parts and we plan to release the first part in the next few days.

The film has been made by Regis Media in conjunction with RockWealth, a financial planning firm based at Cheltenham in Gloucestershire which has an evidence-based investment philosophy. By way of background, here’s an interview with RockWealth’s Founding Partner, Tim Horrocks, on what makes RockWealth different and what he hopes the new documentary will achieve.

RP: What were your main aims in starting RockWealth?

TH: The idea behind RockWealth was always to attract the best advisers to give the best advice to clients, with a really long-term perspective. I was still 35 at that point, and had a long career ahead of me, so it was all about having long-term, deep and meaningful relationships with clients rather than offering quick fixes.

RP: You don’t believe in ad valorem fees; your clients pay the same, regardless of how much money they have to invest. Why did you go down that route?

TH: Most advisory firms still work on percentages for charging clients — certainly for implementation of advice. I’ve worked in many environments where those percentages were very high, sometimes 3 or 5%. It always seemed excessive to me and it was often quite hidden. With commissions, clients weren’t really aware of what they were paying. Of course there were big changes when RDR came into force in the UK, requiring that all charges were very explicit, and at that point I decided we needed to be really fair and make it quite clear what clients are paying for our advice. We’re professionals in just the same way that accountants and solicitors are. Whether you’re investing £1 million or £10,000, it’s the same time and care that’s put into giving that advice. We do have some remit to adjust fees if someone can’t afford the initial fee, but we’re certainly not going to charge people more because they have more to start with. That’s not really equitable.

Charging percentage fees also struck me as being a conflict of interest between what is best for the client and what’s best for the adviser. For example, does the client with £1 million in assets really need to invest £1 million? Maybe they only need to invest £50,000. My belief has always been that the client is paying us for advice and not for managing their money.

RP: You also have an evidence-based investing philosophy, but that hasn’t always been the case. Tell me about that.

TH: The company has always tried to be the best that we can be, whether that’s client service, the working environment or client outcomes. So I started reading the evidence in books and blogs and delving into the academic research. It was a real journey for me, and I looked into it for a long period of time. Before I could even begin recommending to clients that they make changes, I needed to be 100% sure myself.

I found the evidence was there and it was supported. Indeed there was such a mountain of evidence there that it was absolutely impossible not to conclude that this was best for our clients. It’s in everyone’s best interests that they should invest in this manner — not just because of costs but because of the higher degree of certainty around outcomes. No one can predict what will happen with markets in the future, but we know that over the longer term, markets do deliver returns. Individual managers try to predict the future but they fail.

RP: You’re big believers in what Vanguard calls adviser alpha. Why is that?

TH: In the vast number of cases, fund managers don’t deliver alpha. But there is mounting evidence that there is a quantifiable alpha that advisers deliver. Vanguard has done a lot of research into this. Their assets are divided between advised clients and non-advised clients, so there’s a lot of evidence there to look at in terms of the different experiences of those clients.

Compounding is an investor’s best friend; it really drives future returns for a client. But it works the other way as well. Costs compound too. So part of adviser alpha is reducing costs wherever you can. A typical managed portfolio could cost at least 1%, before you even start to consider the hidden costs involved in an active strategy. With an evidence-based portfolio, you can bring charges down to about 28 or 30 basis points a year. So we automatically achieve a saving of about 0.7% for a client, and the compounding effect of that level of saving over a 20- or 30-year investment time horizon is absolutely huge.

RP: In your experience, how valuable is the behavioural coaching aspect of the adviser’s job?

TH: Everyone, by their nature, is emotive. When events happen, and they will happen, people make emotional decisions, and those decisions can cost them a huge amount of wealth over the longer term. When markets are high, people are generally greedy and chase returns; when markets are low, they’re generally scared and they sell out. So you have investors entering markets at highs and leaving markets at lows, and again, the effect of that over time is wealth destruction.

The adviser is an emotional circuit breaker. They take the emotion out of decisions. Because you have a financial plan in place, you’ve already planned for these events to happen; we know they’re going to happen, just not when they’re going to happen. If clients are continually educated to expect these events, when they do happen, wrong decisions are avoided, they stick to the plan, and that will provide a successful outcome more often than not.

Value is often perceived by an adviser as being investment performance, which is the one thing, as an adviser, that we cannot control or influence. Where we actually add value is in having a plan, whether that’s accumulation or decumulation, working out the allowances that are available to make sure that taxes are minimised, behavioural coaching, helping the client avoid market timing and trying to pick the next big thing.

RP: So what does good financial advice actually look like? When do you know you’ve done a great job?

TH: A good financial adviser will always ensure there’s a strategy in place for a client, so they can realise their ambitions. We’re always trying to help our clients work out their goals, what it is they’re trying to achieve. By knowing what those goals are we can try to make sure that they happen. So for some clients, they would love to stop working today, they want to go on trips and holidays and enjoy experiences before it’s too late. Some people love their job and want to carry on doing it. It’s about providing clients with certainty and giving them the freedom to do what they want to do.

One of the most rewarding experiences is when clients have that realisation that actually they’ve got enough money to last the rest of their life and they could stop working now and fulfil their dreams, without taking undue risk with their money.

RP: Finally, what are your hoping that your new documentary Investing: The Evidence will achieve? How do you want people to respond to it?

TH: Everyone should know what their own investment beliefs are. If they’re being advised by someone else, they need to understand what their adviser’s investment beliefs are. The most important thing is that people understand how their money is being invested and why. Is your adviser evidence-based, or is your money being invested in an active strategy? Is it your best interests as an investor that are being realised or is it someone else’s interests?

Regis Media, which produces Adviser 2.0, has a wide range of videos and articles that can be branded for financial advice firms. This includes content specifically designed to reassure investors during periods of market turbulence. Visit our website and YouTube channel, or email Sam Willet or Christina Waider if you would like further information.