IFAs are increasingly using asset allocation tools as they try to boost the performance of their clients' portfolios but not everyone believes they are as useful as their manufacturers claim.
Asset allocation tools recommend what percentages of each asset an inv-estor should have in their portfolios, often combined with suggestions for exposure to geographical regions. This gives IFAs a systematic way of constructing portfolios for a whole spectrum of clients, whe-ther they are risk-averse or keen to chase high returns. But while some firms view them as fundamental to their business, others do not use them at all.
Hargreaves Lansdown investment manager Ben Yearsley says: “We have a portfolio management service where we put suggested weightings in different age groups and so on. We will put together, say, four suggestions for different age groups but we do not use any asset allocation tools at the moment.”
HL's fund of funds service drills down deeper than most asset allocation tools but the firm only provides style information to its general client bank to enable them to construct their own portfolios. But some of the biggest proponents of asset allocation say portfolio construction requires greater skill than many realise.
Selestia director Bill Vasilieff says: “Portfolio construction is very complicated. You need software to do it in a robust and systematic way. Without tools, it is extremely time-consuming.We are finding that more and more advisers are asking us to set up pre-designed portfolios, which streamlines the process even further.”
Selestia's asset allocation tool is, unlike many, fully integrated within its system. Therefore, an IFA can construct a portfolio using its tools, then proceed directly to the transaction, having left an indelible audit trail which can be referenced at any time in the future. Selestia says that, as IFAs take the process increasingly seriously, there is growing demand for this kind of material advantage.
Some firms, however, are less convinced about the merits of tools which they believe are not often used eff-ectively. The Money Portal, which has been a vociferous critic of IFAs who, it believes, in many cases do not work hard enough to earn their trail commission, says asset allocation modelling is fine in principle but poor in practice as times goes on.
Head of communication Kerry Nelson says: “I do not think the tools are good for individual client needs in terms of making bespoke portfolios. Everyone is different and they have changing needs and risk profiles over time. These models have to meet these needs so IFAs can't be slack about keeping them up to date.”
Nelson fears that many IFAs see the tools as a one-shot deal, where they can construct a portfolio and, aside from replacing underperforming funds, forget about any further servicing. Skandia, which was among the first providers to build a portfolio construction tool, admits this is a concern but says the problem can be largely – but not completely – countered with automatic rebalancing facilities.
Investment marketing manager Ian Thomas says: “It is something that needs to be watched but I think that IFAs are taking construction increasingly seriously. There is a risk that portfolios get left but we can rebalance portfolios as often as investors want although there is a danger that this is done too often.”
Skandia is looking at ways it can support IFAs trying to move away from transactional models, which seem likely to take the form of annual payments in addition to trail and up-front commission. Although Thomas admits this could be open to abuse, he says the move should help IFAs place a greater emphasis on ongoing service, particularly in areas such as portfolio management.
IFAs, in the main, are enthusiastic about portfolio tools and asset allocation, to the point where some firms have built their own systems specifically designed for their business models. Bestinvest, for example, takes the asset allocation det-ails of every fund – sourced from a variety of data providers – then looks at geographical exposure and cap size. A series of model portfolios for all risk profiles are then constructed and offered to clients.
Business development manager Jus-tin Modray says this process is central to Bestinvest's mode of working. He says: “Asset allocation drives performance to a greater extent than picking a good or a bad fund. It is a core to investment advice and fundamental to what we do. It is incredibly useful.”
Fund groups on the whole also see asset allocation as the most important way IFAs can add value but tend to be ambivalent about the way advisers choose to do it. Threadneedle communications director Richard Eats says: “It is the key thing that IFAs can do for clients. They should be able to produce a sensible working spread of investments and not just allow clients to just put all their money in tech or any other sector.”
Asset allocation, however, is not necessarily the sole domain of IFAs. Fidelity offers a range of lifestyle funds which move from equities to bonds through time, saving advisers and investors the hassle of doing it themselves.
But some IFAs believe this is no substitute for a regularly updated portfolio of investments which can more accurately reflect changing risk profiles and needs. Construction tools can dramatically simplify this process but they need regular use to be of serious worth to the long-term investor.