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Cover feature: When does advice end and investment management start?

Are the boundaries between advice and investment management becoming blurred?

Where does advice end and investment management start? For some advisers, fund-picking remains integral to what they do as a financial planner. Others see their value in their soft skills and wider advice, leaving specialist investment managers to do what they do best with the client’s funds.

The advice profession is currently being pulled in two directions, as the growth in discretionary permissions, model portfolios and centralised investment propositions is making some IFAs look more like traditional fund firms, while the life planning movement looks to abstract an adviser’s role away from just managing investments to maximise returns.

Muddying the waters

There are a number of ways in which investment management is creeping more into advisers’ businesses. Data recently acquired by Money Marketing shows nearly 650 advisers have gained a discretionary investment permission in the past five years compared with 475 new authorisations for advice permissions.

While Platforum research suggests the number of advisers with discretionary permissions is still relatively low, at around 16 per cent, 11 per cent plan to get them in the next five years, and they have become particularly attractive for larger firms.

What is more, with the FCA’s current focus on value throughout the advice chain, some have argued that paying for an expensive discretionary fund manager may fall foul of the regulator’s value for money test, leading more planners to look to cheaper in-house solutions.

Baillie Gifford distribution and marketing director James Budden says: “Turn back the clock to the RDR, there was a strong feeling that advisers would give up investments as such, or choosing investments on behalf of clients, and outsource them, and the obvious place would be to wealth managers, with their resources and permissions. That was the perceived wisdom, and to a certain extent that has happened, but not to the extent many thought it would.”

Budden notes there is a “layering of charges” when outsourcing fund selection. He says: “There is double charging as such, so there is value in advisers picking funds themselves.”

While estimates vary widely, Budden expects that 25 to 50 per cent of advisers still pick funds themselves.

He says: “The mix of approaches is healthy, it offers choice. It’s up to us to compete in both areas. The challenge is for wealth managers to offer something different. [Advisers] will end up picking some funds, but how do [fund managers] differentiate on both price and service?”

There are further advantages to taking more control over clients’ investments.

FE regulatory consultant Mikkel Bates says it may actually be easier in some cases to navigate the Mifid II client reporting rules for advisers with discretionary permissions, for example. Discretionary firms will have to report a 10 per cent fall in a client’s portfolio if it happens by the end of that day, but this rule also applies to advisers who outsource to discretionary fund managers, and there is currently confusion surrounding who will take responsibility, as advisers will not know full portfolio details, but DFMs often lack specific client data.

Bates says: “There are massive areas in between that cross both [advice and investment management]. Both Priips and Mifid scour the whole gamut, in terms of producing the products, but then there’s what advisers need to know, like the projection of costs and charges and the effect of charges on those returns.”

Some prominent advisers, such as Strategic Solutions’ Kevin Forbes, have set up a discretionary business separate from their advice business to refer other IFAs to. More widely, vertical integration within advice and provider groups has, in many cases, created businesses which have widened their reach to begin generating significant flows into in-house funds.

True Potential, for example, saw inflows boom 200 per cent in the year to August, attracting £2bn.

Great expectations

Investors are still hungry for returns – hungrier than many advisers think is realistic. Over the next five years, they are expecting their money to make an average annual return of 8.7 per cent, according to research from Schroders. Many still expect their financial adviser to be the first port of call for this and work to construct the best portfolio possible. More advisers may look to build their own in-house portfolios to make quicker decisions, take a greater fee share, and appeal to a wider set of clients, many commentators argue.

FE survey data shows around half of advisers plan on placing 50 per cent of clients’ assets in a model portfolio of some kind, while consultancy NMG estimates that around a third of all investments under £50,000 are already held in model portfolios.

Adviser view: Jeremy Squibb,
Head of life planning, Serenity Financial Planning 

Our perception is that there are more and more people out there who want guidance and support, but when you look behind the money question, that starts a conversation, and there’s a whole lot more stuff behind that. Does the consumer really care about bond yields and Sharpe Ratios or any of the ways we manage or measure their financial investments? Or are they more concerned about what it means in their lives? Some people like to pin their colours, that we have built our own discretionary funds, and we are demonstrating our expertise in us being able to pick them, but I don’t have that many clients who are interested in drilling down into the details of the portfolios we have.

Platforum data shows model portfolios run in-house account for the largest share of assets among the investment strategies it surveyed advisers on. Model portfolios run in-house accounted for 35 per cent of adviser assets compared with 19 per cent for model portfolios run by third parties. A further 5 per cent were in bespoke DFMs in-house.

RDR inducement rules have also not completely removed fund manager contact with advisers as some believed they would, with training sessions and workshops still a common feature of the market. Mifid II clarifies that all payments from third parties to advisers except “minor non-monetary benefits” will be banned, but this is unlikely to change the situation radically, allowing for continued day-to-day overlap between advice firm and provider representatives.

Meanwhile, others have pointed to developments in the way advisers are represented by trade and professional bodies as an area where the influence of investments has grown.

‘Pure’ financial planning was a mantra espoused by legacy professional body the Institute of Financial Planning, but many advisers feel it has become more investment focused since merging with the Chartered Institute for Securities and Investment. Adviser trade body Apfa has now also been subsumed into the Wealth Management Association, the trade body that represents investment managers.

The Personal Finance Society, part of the Chartered Insurance Institute, which historically served the provider sector, has upped its lobbying efforts in defence of financial planning in recent years, adding more planning qualifications to its investment roster.

The case for separation

But at the same time as the investment landscape and the advice landscape are becoming intertwined, other factors are pulling them apart: primarily the life planning movement. Courses offered by the likes of the Kinder Institute of Life Planning are now well known among the financial planning community.

Many of the sessions at the PFS’s Festival of Financial Planning earlier this month were focused on the positive impact deep exploration of a client’s goals and objectives away from financial returns could have on their lives. ‘Holistic’ planning has become a buzzword to mean a whole range of services over and above investment management which can also justify IFA fees when the value for money scrutiny comes.

Mazars IFA Natalie Wright says her firm operates a separate in-house investment team so planners have “no focus whatsoever” on the investment piece, praising the work of financial planners like Ovation Finance managing director Chris Budd in promoting coaching and behavioural finance within advice.

The mix of approaches is healthy, it offers choice. It’s up to us to compete in both areas

She says: “The profession is becoming more like life planning than the old-school investment advice. It’s such a small part now, and that’s really been a change. Since RDR, and with a larger number of young planners, it’s just become part and parcel of what we do, and I see that growing more and an emphasis on coaching.”

Wright agrees that DFMs will come under real cost pressure from advisers as more begin to assess the value of investment management services to clients, but she argues this will simply lead to more efficiency or robo-advice-style investment solutions, rather than a flood to insourcing. She says: “Once we start to commoditise the investment element we are going to see those costs start to come driven down.”

While estimates vary of how many IFAs still fund-pick, Barwells Wealth trainee financial planner Sean Banks says, whatever the number is, it will be “way too many”.

It is also worth noting that while RDR put an end to commissions, it also started a move to fee transparency that has seen advisers separate advice fees from investment fees – outsourced or otherwise – platform fees and other charges.

This has also led to a move towards fixed fees among financial planners when billing for advice, without a direct equivalent when purchasing fund management services.

In October 2016, FCA data showed 48 per cent of advisers were charging on a percentage basis. By May this year, that has fallen to 42 per cent, with more than half charging either per hour, fixed fees, or using a combined structure. In a snap poll on the Money Marketing website, advisers were split pretty evenly: 42 per cent said they thought all clients should get life planning, 48 per cent said they should not, with the remainder unsure.

Signpost Financial Planning director Nigel McTear agrees that specialist, experienced investment houses, with the benefit of large research teams, can generate better performance than advisers, leaving advisers to focus on planning.

He says: “The reality is that the days where an adviser can come up with a suitable asset allocation, which they possibly can do, but then filling it with funds, I think they will struggle to do it as proficiently as a DFM. My personal feeling is that advisers are best placed to deal with financial planning and optimising tax. They are less well equipped to deal with investment management.

“But the lines have become quite blurred. There’s a danger that the client doesn’t really understand who is responsible for what. Probably more of a concern is that the Financial Ombudsman Service doesn’t understand where that starts and stops.”

Expert view: The simple life has been made so complicated

How many times have you heard conversations start with “when I was young…”?

As human beings, we are generally inclined to store positive memories more prominently than bad ones, which means we will tend to view the past in a generally positive light. In the context of our profession, I’m not going to make a case for better, but it does seem that more simple is a pretty straightforward concept.

Joining the UK financial services industry 20-odd years ago, life did seem much more simple than it is today. Generally speaking, advisers provided advice, fund managers managed funds and insurance companies insured what we held dear. What halcyon days. Today, those clearly demarked professional boundaries have all but gone, and perhaps most acutely in the advice profession.

In the Schroders Annual Adviser Study, which we did the fieldwork for last week, 42 per cent of advisers told us that they continue to build client portfolios themselves. So nearly 60 per cent of advisers we asked are delegating some level of portfolio management responsibility to another firm.

This 60:40 ratio is probably not too surprising but it does highlight a question about how we think about financial planning, investment research and investment management. There is clearly a blend happening and advisers are obviously selecting a very wide range of investment solutions for their clients (which in the main are held on platforms operated by companies that used to be insurance companies). As a great man once said (in the distant past): “life is really simple, but we insist on making it complicated.”

James Rainbow is co-head of UK intermediary at Schroders



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There are 2 comments at the moment, we would love to hear your opinion too.

  1. Horses for courses, as always. In my firm we are very much lifestyle and financial planners first and foremost but we also build model portfolios for our clients. Why? Well, we enjoy the work and we seem to be pretty good at it – our Moderately Adventurous portfolio has grown by 89% (net of fund charges but not our/platform fees) over the past five years, beating its benchmark by 38% with only slightly higher volatility. That investment out-performance has helped our clients to achieve their chosen lifestyle more quickly and helped us to grow our recurring fee income. A win-win if ever there was one!

  2. Investment management – to a greater or lesser extent – is part of the advice process. Those who abrogate this responsibility are in my view only partial advisers. This harping on about ‘soft skills’ merely confirms that some are not really comfortable being real advisers and would rather be social workers. Or rather just cajoling people onto doing or buying things they didn’t really want in the first place.

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