Increasing regulatory requirements and the quest for greater efficiency are leading more advice firms to bring in outside expertise
A combination of regulation, legislation and improvements in technology are encouraging advisers to develop more rigorous and consistent processes. Recent research we undertook found over two-thirds of advice firms now operate a centralised investment proposition, showing a steady adoption of more standardised methods of running portfolios.
How firms choose to create and implement their CIPs are as diverse as the businesses themselves. Influencing factors include:
- Investment philosophy in matching solutions with clients’ current and future needs
- Business model, target markets, size and level of resources
- Insourcing and outsourcing strategies
All these points affect how formalised a CIP is. The ultimate purpose of a CIP from a regulatory perspective is to ensure firms have effective control mechanisms in place to monitor and manage client risk and outcomes. However, it seems the means to achieving these aims are not prescriptive.
Investment committees’ role
A firm’s investment committee is normally responsible for creating and overseeing the CIP and the various other solutions. That said, around half of firms tell us they run formalised investment committees – substantially fewer than those that operate CIPs.
The use of both CIPs and investment committees varies significantly by firm size. Smaller firms are more likely to have a CIP than an investment committee, while larger firms are more likely to have both. At the very top end, firms are slightly more likely to have an investment committee than a CIP.
This is no surprise; larger firms require greater oversight of advisers’ investment recommendations and activities. But it does not follow that large firms are more restrictive with their advisers than smaller ones.
As one investment committee chairman of a large firm put it: “Why would we say our investment committee can tell the advisers what the right outcome is for a client we have never met? That sounds like hubris to me. We put in some risk controls; put guides of what we don’t want.”
A growing presence
There is already a strong presence of external consultants on investment committees, particularly in large firms and those with discretionary permissions. But smaller firms can also be heavily reliant on them, especially if most of their investment solution is outsourced to one. Consultancy work for advice firms mainly consists of:
- Recommending investment solutions, such as asset allocation, portfolios for different client profiles and fund panels
Monitoring and reviewing performance of internal and outsourced investment solutions to determine whether portfolios are matching the expected risk return outcomes for client profiles.
Research firms and investment houses are also being tapped up to sit on committees. In some cases, this is in a semi-official capacity, contributing to debate. In others, they are more formally appointed as non-executive chairmen.
Another area of external influence is in the construction of firms’ fund panels. Most firms we spoke to buy their fund lists from research agencies, with the remainder using agencies’ tools to help them create their own. Only a handful of firms operating fund panels do so without third-party research.
Regulatory requirements such as Prod and Mifid II, as well as a general desire among advisers to make their businesses more efficient, are leading to more formal processes. We expect increasing numbers of firms to further formalise their investment governance and bring in more external expertise.
Research agencies are also becoming increasingly influential-, embedding themselves in advice firms’ investment processes rather than being thought of as only issuing fund ratings.
Mariam Pourshoushtari is an analyst at Platforum.
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