Evolve spreads the word on index funds

Antony Williams, managing director and founder of Evolve, answers questions from Frances Hughes.

Q: You founded Evolve in 2004. How did it start and what was the ethos behind it?

A:

I founded Evolve in November 2004, but it did not start trading properly until January 2005. I wanted to offer comprehensive, fee-based, totally impartial, client-focused financial planning. Our service proposition is to provide that quality of service, to people who can afford [from as little as] 50 a month. We are not being ultra-exclusive.

We will do something for people with much more modest means. We bring down the cost of investing by using passively managed funds, which makes us different to other firms. We broadly think that on market investments, active fund managers do not deliver sufficient outperformance to warrant their fees.

Q: What services do you offer?

A:

We offer tax planning and estate planning as well as investment advice. We aim to offer all of that for less than, or the same as, it would cost to pay an active manager. We offer lower costs and our staff have a minimum of three AFPCs [Advanced Financial Planning Certificates] and a CFP [Certified Financial Planner] licence. We have very high standards in terms of qualifications.

Q: Is the main focus of your business to offer financial advice on investing, rather than tax planning, for example?

A:

It is more the focus. We do all the other things and they are very important. But for life goals, investment is the engine. What we are aiming to do is help people achieve financial independence. [For that] investment has to be the core focus.

Q: How many clients do you have?

A:

We started with no clients, from absolutely nothing, and only me, and now have just under 100 clients and seven certified financial planners.

Q: What is your client base?

A:

We have three different [levels of] services. The first is for people who are at the start of their financial planning, so they tend to be younger. We charge 50 a month and the average age is 35. The second is our premier service. [For that] you pay more but you get more. Clients tend to be a bit older and a bit wealthier. The average age is 55.

Last there is our evolution service, where clients have more than 1m in investable assets. These clients are typically older. The idea is clients can migrate through the services.

Q: You are completely fee-based. How important is that to your business?

A:

It is important for two reasons. The first reason is there is a known fee. Clients know exactly what and who they are paying. Commission can cause clients to get advice that is not as good as it could be. And as a means of payment it does increase the cost of investing.

Q: You say your approach to investment is built on “academic research, not flavour-of-the-month fund picks”. What kind of academic research do you use?

A:

We use research from a number of universities in America. All of it suggests asset allocation is the most important factor in determining the variability in investment returns. Deciding how much you put into equities, cash, bonds and property is a key aspect. It is about how much risk the client needs and wants to take.

Research also suggests active managers do not consistently demonstrate an ability to outperform indices. And when they do it is more often than not through a style bias to either small-cap or value stocks, for example, than any other factor. Some, of course, do [outperform] at times and some do not. But on average they do not.

Third, you cannot find evidence that advisers have the ability to pick the best funds. [Instead you should] save that 2.5% or so and accept that a benchmark return is what you are going to get, but at a lower cost.

Q: Is your belief in index funds purely down to cost?

A:

It is about lower costs and more predictability of returns. By using an index you do not get that style drift.

Q: How much money can be saved by paying lower charges?

A:

A 3% charge is not unusual [for actively managed funds]. On a 250,000 investment [with a 7% growth rate], on which you are paying 3% charges compared to 1% charges, you are looking at a difference of more than 30,000 over five years. Over 20 years, the difference could cost you half of your return.

Following star fund managers around is also expensive. Typically you could pay 2-3% each time a switch is made. You will not get a very good return because of all that moving and the cost of the funds each year.

Q: Do you only advise clients to invest in index funds?

A:

For core portfolios, bonds and equities, yes. For property and satellite portfolios, no. If someone wants exposure to commodities or very specialist markets, or geographical regions, we do not use index funds. Where investment markets are inefficient we use active fund managers.

Q: What feedback do you get about your use of index funds?

A:

No prospective client has chosen not to deal with us because of this part of our proposition.

Q: How often do you review portfolios?

A:

There is very little need to do anything much more regularly than once a year. The only time we would is if there were significant movements in an asset class. What we are doing is rebalancing back. We are not making tactical decisions.

Q: Do your clients show an active interest in their portfolios?

A:

On average our clients are not great followers of investment. They are interested in making the best of their lives. They do not see investments as being exciting in their own right.

Q: What makes Evolve different from other IFA firms?

A:

The fact that we use index funds and have a broad church of clients. Also, we are totally fee-based and have highly qualified staff. That demonstrates to our clients that we are serious about professionalism.

Q: What trends have you noticed over the past year?

A:

One trend we are seeing is a general move towards accepting some sort of investment platform or wrap service as an effective way to hold assets. Also, more people are aware of what a Sipp [self-invested personal pension] is and the flexibility it can offer. The benefit is being able to simplify all your investments and keep them in one place. Flexible, open-architecture is more and more the way things are done.

Q: What plans have you got for Evolve in 2007?

A:

Very much steady, organic growth: continue to build our client base, serve our existing clients well and build our team.

EVOLVE FINANCIAL PLANNING

was founded by Antony Williams in November 2004. It offers a range of services including investment, retirement and estate planning and financial protection. Evolve advocates index funds over actively managed funds based on the belief that markets are efficient. Its charges are completely fee-based.