For the latest in our series on how advice firms make their investment decisions, Informed Choice managing director Martin Bamford discusses why he remains sceptical about DFMs and how he picks the right platform for each client
Is your investment management kept in-house or outsourced to a third party?
We outsource elements of our investment management but keep most of the control in-house. Important elements that get outsourced include risk profiling and asset allocation, both from Distribution Technology. We have been users of its Dynamic Planner tool for years and its recent improvements to risk profiling have enhanced the value of this even further.
While we make extensive use of the decisions made by DT’s investment committee, we have our own in-house committee too, which I chair. This consists of our financial planners and paraplanners, all contributing their views and sense-checking the suggested asset models put forward by DT.
Historically, our in-house investment committee would suggest tactical adjustments to the strategic asset allocation positions in an attempt to add extra value to client portfolios. In reality, this complicated what was an extremely simple and effective investment approach, so we now stick to the big picture of asset allocation and then select funds to populate the broad asset classes.
What investment options do your clients have?
Most of our clients use one of our model portfolios. These are then tailored to suit individuals – for example, adjusting the cash allocation to cover withdrawal needs or reducing allocation to property if these assets are already held elsewhere.
Our model portfolios are currently made up of unit trusts and Oeics, with both actively managed and index tracker funds. In the past, we made use of exchange-traded funds but prefer trackers today, as these are more widely available and tend to be cheaper to trade.
For clients who need something more bespoke, we follow an identical investment advice process, using the same fund selection ideas and philosophy to support recommendations.
How are funds selected for the model portfolios?
Fund selection is carried out in-house, based on a simple quantitative screen I built more than a decade ago. This screening process helps us to identify funds which have the desired attributes of low-cost, consistency and good risk-adjusted returns. It means we only recommend funds that do what they say on the tin.
We apply our quant screen to the entire universe of investment funds, scoring them based on 12 factors that represent the attributes we are looking for. Once scored, we carry out more detailed qualitative research, including conversations with fund managers, to understand their philosophy and process in more detail.
Why do some funds not make it on to your panel?
One factor we always filter out is funds with a very short track record. I would feel uncomfortable recommending any fund to a client until it had been established for at least three years, preferably much longer. There are so many launches that fail to attract sufficient assets or perform poorly. With a great range of long-established funds from which to choose, there is no need to recommend new ones.
Date company established: 1994
Assets under management: £252m
Number of staff: 12
Number of clients: 384
Platforms used: Fidelity FundsNetwork and Ascentric
DFMs used: N/A
How often are funds in the model portfolios reviewed and what would lead to changes?
We formally review our fund selection once a year in December. It is unusual to see us change more than a couple of the funds in our model portfolios; the screening process we use is very good at identifying consistent performers.
During the course of the year, any major events at a fund provider or in the management of a selected fund could prompt an ad-hoc fund review in that sector. In the past decade, this has only happened twice.
Our asset allocation models are reviewed quarterly by DT, which makes adjustments typically once a year. If there are any significant changes to the capital market assumptions it uses, it can result in more frequent asset allocation changes, although we are yet to experience this.
Do you ever use discretionary fund managers?
We rarely use DFMs, as our investment process caters for the majority of our clients. For larger portfolios – say, more than £2m – we often increase the number of recommended holdings within a model portfolio to increase diversification.
Where clients have a particular need or desire to hold individual company shares within a portfolio, we would outsource this to a DFM. But, typically, we find what DFMs have to offer quite expensive and it adds little to value.
Which platforms do you use and why?
We will always choose a platform based on what the individual client needs. Our current platform of choice is Fidelity FundsNetwork, where we recently exceeded £100m of assets. Before that, we were making extensive use of Ascentric, but also hold assets on Cofunds, Transact and others.
Our preferred platform changes from time to time based on the cost of holding assets and, most importantly, service standards and functionality. It is incredible just how variable service standards can be from even the largest platform providers.
We recently outsourced a comprehensive platform due diligence and review exercise, with the results due in shortly. This exercise will inform our platform choices for the next year or so.