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Asfof you like it

Start advising your clients to let an expert choose their funds.

Some colleagues and myself recently sat the Chartered Insurance Institute’s new investment module, JO6. Now we all feel better equipped to talk to clients about saving money. We can describe asset classes in more detail, spin yarns about risk/reward balance and even bluff our way in economics.

What we don’t feel able to do is manage a fund of funds. Why should we? It is not part of the syllabus. There was no chapter on “selecting fund managers likely to outperform over five years” either.

But many consumers would expect us to do just that and most IFAs would accept the mandate. It is an established tenet that an adviser gives part of his “added value” through fund choices and portfolio management.

The JO6 model goes something like this – adviser meets client, client answers questions, adviser decides risk profile, client hands over money, adviser invests into a spread of retail funds and leaves things alone for at least a year. Commission changes hands and everyone is happy.

But this way of doing business has some gaping flaws. How will the adviser choose the funds to recommend? In most cases, this will be by extrapolation from past performance. Some businesses have invested in impressive analysis systems to make this all seem terribly technical. A barrage of statistics often wins the client over. It is absurd.

So much for fund picking. What about managing the portfolio? A lot of IFAs talk proudly of their “annual review” process where dogs are ditched in a move to the current crop of table-toppers and even a bit of rebalancing. Outside a bond, this presents a few problems: more initial charges to be paid, perhaps even some CGT. The drag on portfolio performance must be big and the drag caused by the clumsy rebalancing.

Except we would probably never know. Few of these amateur portfolios are ever looked at with the type of scrutiny reserved for a retail fund of funds, which is what they amount to in practice.

Some die-hard advocates of this model have signed up to the Adviser Fund Index, designed to prove that IFA fund picks really do add value. The graphs look impressive – AFI Cautious has beaten both Apcims Income and IMA Cautious over two years. I might be tempted to let my adviser pick funds after all but for the underlying story – of the 104 funds fed into AFI Cautious recently, fewer than 10 actually belonged in the IMA Cautious sector. Some AFI “Cautious” funds included shrinking violets like Jupiter European special situations, widows’ and orphans’ favourite Aberdeen Asia Pacific and stable, unadventurous First State Global emerging markets. Cautious my foot.

This is no way to provide investment advice. Being a good, versatile IFA is a full-time commitment. It is ludicrous to moonlight as fund managers with no formal investment management training, little access to the managers we recommend and inadequate research capacity.

What is the solution? Broker funds came and went. What the industry needs is professional fund management without conflicts of interest. At Snowdonia Asset Management, we specialise in Adviser Sponsored Fund of Funds (Asfofs). The IFA employs a full-time professional to select and supervise a fund portfolio. The IFA lays down a risk profile and tactical allocation limits but crucially plays no part in investment decision-making.

This is true independence because funds are chosen only because a qualified expert has judged them likely to perform in the months ahead. The IFA retains the right to appoint and replace the manager of each portfolio. The manager is held to account by his investors. He must stand up and justify his decisions. An Asfof manager cannot get away with taking needless risks in pursuit of headline-grabbing returns. You will never see a Snowdonia fund heading a past performance table and we are proud of the reasons why.

Next time you write a suitability letter, pause for thought over that disclaimer “Past performance is no guide to future returns”. How does it sit with the process you have just gone through to recommend a fund? If your badge reads “Adviser” and not “Part-time fund manager” then do what it says – start advising your clients to let an expert choose their funds and free your time for what you do best.

Rick Eling is development manager at Snowdonia Asset Management.

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