Things to consider when choosing your investment adviser

Charities should be clear on when they might need funds to be made available and the amount of risk they can afford, writes Peter Gotham

Investment is more complex now than in the time of Jane Eyre, writes Peter Gotham
Investment is more complex now than in the time of Jane Eyre, writes Peter Gotham

Most of us struggle with investment decisions, whether we are trying to top up our pensions or to help our charities provide resources for forward planning.

In times gone by, Mr Rochester (in the novel Jane Eyre) would use government debt 'consols' as the safe and, for most, only practical investment. The Joint Stock Companies Act 1844 allowed larger numbers of companies to be incorporated - heralding an era when everyone could share in the rewards and risks of investment. Over time we seemed to have more confidence that a reasonable return could be achieved with low risk - but this has not been the case over recent years. So how should a charity decide to invest, and is it worth paying an investment manager?

This is only a broad heads-up and certainly does not cover the position for charities with major funds, an international perspective or a requirement for a long-term strategy; but it covers issues that require thought and care.

Charity trustees have a general power of investment and the power to appoint advisers. However, the Trustee Act 2000 requires those who invest charity funds to exercise a duty of care; and recent experience underlines the need to ensure that the client funds are held separately, that advice is sought from properly qualified people and that managers are sufficiently substantial and regulated to be able to reassure you that all charity and client care investment rules are adhered to.

However, even taking all this into account, some stories - such as the Icelandic financial crisis and the Bernard Madoff 'Ponzi' scheme - show that if it looks too good to be true, it might well be. Common sense and a degree of understanding of the investment strategy is also required.

The Statement of Recommended Practice expects charities that have significant investments to state their policy and objectives and the extent to which they take social, environmental or ethical considerations into account. Helpful guidance, such as the Charity Commission's Charities and Investment Matters: a Guide for Trustees (CC14), is available.

Cash and bonds now offer little income and, since the objective is to maximise returns, one aspect that is getting increasing attention is the level of fees and charges. These can take a big chunk out of the charity's investment income. Despite the changes being forced on the industry, this is still a complex matter. The charges can arise in several ways: as fees from the adviser; as an initial charge; as an annual charge for a collective investment such as fund, unit or trust; or as a dealing charge.

However, an investment house can negotiate a lower charge from funds and can increase the share of actual shares in the portfolio. The difficulty is in assessing the value derived and the overall effect. As an illustration, careful advisers will use funds to lever in expertise when their own knowledge is limited - for instance, investing overseas. Some level of regular review will always pay dividends. There can be an argument for using tracker funds, although these are not necessarily as transparent as they might at first appear.

We should be clear when we might need funds to be made available and the amount of risk we can afford, and the sort of charity I have in mind will invest only in assets that are immediately realisable. Diversification can be achieved in various ways - which can make comparison to a benchmark difficult. But a medium-term perspective of at least three years must be a prerequisite to move away from 'consols' - or the modern equivalent.

Peter Gotham is a partner at MHA MacIntyre Hudson

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