Who wins with pre-packaged investment advice?

There is no doubt a major trend in the industry over the past five years has been for the majority of retail investment to go through administration platforms such as wraps and master funds.

This has been driven by the need for advisers to concentrate on their core competencies, which is not administration, increase efficiency and services to customers, and lower costs.

There would be little argument now that these aims have largely been achieved, albeit at a cost to the client, and contributed to strong growth in the retail market and reduced growth in the traditional wholesale market.

However, over the past couple of years there has been a huge growth in ‘packaged investment solutions’, which effectively means an outsourcing of the investment function by advisory groups to research houses/asset consultants.

These packaged solutions provide portfolios for different risk categories, and asset classes, have managed fund and direct stock portfolios, and have specialist options as well.

From the adviser’s point of view, many see it as the further outsourcing of a non-core skill that basically determines the success of a client’s investment strategy over time.

An adviser need only match a client to an appropriate strategy, and that strategy will be automatically reviewed and changed over time by the research house.

The benefits to the adviser are obvious, particularly where an operation has a number of relatively small clients who cannot be effectively serviced on a time cost basis.

From the strategy builders point of view, the task of reviewing portfolios and servicing the client with updates is easier, since only a limited number of investments are involved.

In fact, clients can be supplied with as little or as much as they require, with advisers receiving all of the materials supplied to their clients.

From the clients’ point of view there are a number of advantages. For small clients there is little doubt they can access a broader strategy, with far superior levels of service than would be the case with individual products.

The skill and investment experience of the team providing the strategy advice would also appear to be a benefit to clients in comparison to the inconsistent strategies adopted in the past.

The results being achieved by the leading providers of these strategies would appear to emphasise lower volatility and increments of value added over time, rather than following last year’s top performing sectors or fund to a poor outcome.

In fact, the science of combining the relative strengths of different organisations into a coherent strategy has improved markedly over the past five years, and contributed to consistent accumulation of wealth for clients in a period of extremes in performance.

The provision of goal oriented, direct stock portfolios to clients would appear to offer the greatest scope for improvement, relative to practices being used in the industry at present.

Since most financial planning firms source their stock advice from brokers, there is little or no risk analysis performed on the recommendations as a portfolio.

It is therefore impossible to ensure that stock recommendations overall meet the needs of clients, and that they combine efficiently with the rest of the financial plan.

Therefore, it appears a revolution is taking place on the back of efficient low cost administration platforms. The outsourcing of the investment function appears to be offering the majority of clients access to financial solutions that are subject to greater ongoing financial rigour.

However, in the medium to long-term, two dangers exist for clients. Firstly, the dominance of some research players in the market and the continued consolidation of the financial planning industry may mean that some fund managers get huge amounts of inflow, while others get nothing. This could lead to clients not having access to some capable managers who are simply not considered by gatekeepers.

Secondly, financial advisers may get so used to leaving the responsibility of monitoring client investments to the portfolio provider, they may not notice when either client circumstances have changed or the investment strategy is no longer appropriate.

A model portfolio approach may go some way in alleviating the dangers highlighted above. A planner still retains some flexibility in this option and so is able to override one investment with another.

A well-designed model portfolio would use a building block approach, so replacing a manager or stock would be relatively easy to do. It may also help the advisers in understanding why the investments were put together and therefore benefit from the research house or consulting experience, rather than merely accepting it.

In fact, the increased demand for model portfolios seems to support the attractiveness of this pre-designed yet flexible approach to investment strategy.

In my opinion, the positive benefits of packaged portfolios far outweigh any negative impact by a large margin, and are in the best interests of small to medium-sized clients.

Stephen van Eyk is managing director of van Eyk Research.