Private portfolio management is often disregarded by advisers for all but so called high-net-worth clients. But why is this so, in view of the wide range of services that are now available to satisfy differing client objectives and requirements?
It can no longer be argued that portfolio management is only available to more affluent investors. Some providers will allow minimum investments from as little as £10,000. These need not involve a disguised unit trust fund of funds, offering nothing in the way of individual tailoring or a personal service that genuine portfolio management will provide, with potential exposure to unit and investment trusts, direct equities, fixed-interest holdings and cash. A good portfolio manager will also recognise opportunities throughout the tax year to exploit tax allowances, thereby mitigating liabilities in the future.
He will also manage the cash element as a valuable tool within the portfolio's structure, rather than simply chucking the money in the day it arrives. Absolute diversity in underlying components mitigates risk and allows opportunity seeking within investment areas which would otherwise have to be avoided.
Perhaps this disinclination has been caused by the perceived competition between IFAs and portfolio management companies, with advisers fearing the loss of control of their clients' investment affairs. In reality, this could not be further from the truth and is perhaps based on a lack of real understanding. Indeed, both parties – not to mention investors – can benefit considerably from close working relations.
Alternatively, perhaps the limited use of portfolio management services is a result of the “convenient” alternative of with-profits bonds. Safe and secure, tax-efficient, high returns are all used to describe with-profits bonds but surely expensive, tax-inefficient, hidden costs and poor returns are now more appropriate.
I struggle to understand how such investments can continue to be sold as the “best option”, when the contributions are going straight into the same funds used by endowment policies.
Falling bonus rates from with-profits endowments have resulted in insurance companies being forced to issue revised growth projections to investors, as well as producing a dramatic fall in the number of new endowments being sold. Yet it seems that because bonds do not have target returns, their recommendation has continued regardless. To use the term “low risk” for a fund over 80 per cent exposed to equities is quite a curious description, too.
The automatic deduction of tax from all income and gains (with no possibility to make a reclaim, regardless of tax status), the existence of a market value adjuster (which effectively represents a get-out clause for insurance companies in the event of a major stockmarket correction) and high (and hidden) charges simply raise further questions.
If bonds are so attractive, why do insurance companies feel it necessary to offer advisers twice as much in initial commission than more “transparent” arrangements, such as Isas? I suspect an overriding fear, and one which plays a significant role, is that without this incentive, sales figures would decrease dramatically.
Numerous new clients are encountered every week who have been sold a plethora of bonds, yet, at the same time, have not in the past used their Pep and Isa allowances. They do not even understand capital gains tax, let alone have some investments in place that are capable of utilising this ever more valuable allowance.
Unfortunately, direct salesforces and execution-only discount brokers are not helping the problem. They take full advantage of the extensive, and indeed expensive, advertising campaigns which increase the number of “easy” sales opportunities of these hugely profitable products for the insurance companies.
It is for these reasons that I am confident that private portfolio management should, and indeed will, play a far more significant role in the future.
Of course, the service will vary from company to company, so it is important to find a suitable manager or range of managers.
The financial services' industry has already experienced the pension misselling scandal and a similar investigation is by no means out of the question concerning endowments. Could further bad publicity arise over the sale of with-profits bonds?
With so many reasons to avoid these funds coming to light, and with so many more appealing alternatives, I am tempted to conclude that this could be justified for ongoing with-profits bond sales.
If advisers have been kept in the dark about the real workings of these products and the full deductions and costs, they will know that ignorance is not an adequate defence. And what about the typical 10 per cent share of the total fund's return going to the proprietary company which does not appear anywhere in the cost figures to investors – a situation the regulator is happy to accept?
With the facts really coming out, IFAs need to know how vulnerable they may be.