In a recent article titled ‘Are advisers doing their homework on fund selection’, Money Marketing editor Natalie Holt raised the potential threat of an FCA thematic review if advice firms don’t improve their fund selection processes.
She also highlighted a number of challenges advisers face when attempting to do so.
The piece confronted a number of issues, from the independence of ratings agencies to deliberately vague objectives on fund factsheets and the difficulty of knowing which filters to apply when making selections. It also made the point that surface level research is only likely to incur the wrath of the regulator.
The article got me thinking about why advisers even bother to pick funds themselves, given the inherent difficulties which Natalie highlighted. Research conducted by a number of providers over the years shows that clients generally don’t expect their advisers to be investment experts. The value that they look for is really centred on advisers ‘saving them from themselves’ and giving them the assurance that they are going to be ‘okay’.
The case for inaction
With this in mind, advisers should have little problem in explaining the value which they offer clients, without having to add the unnecessary service of selecting funds themselves. Today’s advice community has incredible depth in its expertise, making it uniquely placed to help a wide spectrum of clients work out their lifetime financial goals and the strategies needed to achieve them. Having done this, advisers then play a vital, and as illustrated above, valuable role, in ensuring they stay on track. I increasingly hear from advisers that they are regularly consulted by clients on major financial decisions such as: ‘When can I afford to retire, or buy the boat I’ve always wanted?’
Today’s financial planners are also experts in deploying financial products and services to help clients achieve their goals. They have to understand the UK’s income tax, capital gains tax and inheritance tax rules inside out, and know how to navigate these rules to help their clients to mitigate the impact of tax on their strategies.
They need to understand the entire universe of products and services available to them, and keep abreast of changes and updates in the market as they happen, to ensure that clients’ solutions remain suitable. They also need to balance cost against service, and risk against return, against a backdrop of changing regulation, legislation and political direction.
The state of play
Given that this vast effort on the part of an adviser seems to provide exactly what clients want, why then, when as Natalie points out, picking funds is so difficult, do advisers continue to bother? Add to that the recent news that the FCA now expects advisers to consider the “expected returns” of investments – in this case linked to DB transfers – and surely it is more risk than it is worth?
One point the article made which particularly interested me was the fact that not all advisers bother to meet the managers which they invest with. On the face of it, this is a valid and important point, but it does also question an adviser’s ability to fully understand a manager’s process.
We wouldn’t be expected to quiz the pilot who is about to fly us on our holiday this summer, and really understand the intricacies of modern aviation, so why should an adviser completely understand the complicated and detailed process of fund management? Remember, no fund manager is going to tell you that he’s not very good.
“Given that this vast effort on the part of an adviser seems to provide exactly what clients want, why then, when picking funds is so difficult, do advisers continue to bother?”
Visit any DFM or multi-asset fund manager and see the depth of talent and resource available to them, and an adviser should be asking themselves – why do I bother? These firms are set up to be experts at all of the things which clients don’t expect advisers to be – asset allocation, risk control, fund selection and ongoing monitoring and rebalancing.
In some cases, they will even tell advisers what sort of returns they should expect from their funds or models, but in all cases they will provide a level of research which only the very biggest and best-resourced advice firms can hope to match.
Surely then, advisers should do what they do well, and rely on expert support for those things which are increasingly difficult to do themselves?