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Display your services in their true colours

In financial services, as with so many things in life, change normally occurs through evolution rather than revolution. Each major change in our industry may feel like revolution but the reality is somewhat different. However, intermediaries have proven through all this change that they can actually increase their market share relative to other channels and that customers do want value-added advice in an increasingly complex world.

Will stakeholder threa ten this position? Some might say the intermediary is not going to be able to continue to operate in the 1 per cent world. In essence, this is true. The solution must be to ens ure most bus in ess exists outside the 1 per cent world. There are a num ber of routes to achieving this but one of the most robust must be investment portfolio planning.

Investment portfolio planning is a natural solution to the problem being faced by intermediaries. The nature of investment products is that they are intangible and the benefit a customer will get is completely undefined at the outset. This makes them unlike any other product in the world.

Added to this, the fact that customers are increasingly cash rich and time poor means the long-term need for value-added advice is assured.

There are some short-term pressures on intermediaries. Product commoditisation is swiftly becoming a fact of life. Rapidly increasing regulation through Catmarks, stakeholder pensions, decision trees, depolarisation of simple products and FSA league tables seem to indicate this Government is increasingly keen on disintermediation.

The natural reaction to this trend has to be for intermediar ies and fund managers to dem onstrate the value of their servi ces to customers. For the investment manager, the task is to prove they can add value relative to index funds. Intermediaries have to demonstrate that building genuinely person al ised investment solutions is pre ferable to the consumer making up their own mind using a decision tree or league table.

Portfolio planning – the act of selecting a wide range of investment vehicles that combine to meet the precise risk, return, time horizon and tax plan ning requirements of indivi dual investors – is the solution.

Intermediaries can now use a range of software and web-based tools to build the types of portfolios which would have been very labour-intensive only a few years ago. Investment managers can increasingly provide a range of simple and sophisticated pro ducts to allow intermediaries to fine tune their solutions.

A traditional model of inv estment planning would have been built on a simple basis dep endent on asset class and geographical area. A typical port folio might be invested 60 per cent in UK equities, 30 per cent in international equities and the balance in UK Gov ernment and corporate debt.

The intermediary could access this portfolio through three main routes. First, the whole portfolio could be delegated to one investment manager by investing in a managed fund. Second, for higher-value investments, the intermediary could use a portfolio or discre tionary asset management service which would deliver a similar portfolio but using multiple fund managers as well as dir ect stock and bond holdings. Last, the intermediary could run their own portfolio of dir ect equity or investment funds on either an advisory or discretionary basis.

In the last 18 months, some would have you believe the traditional model of country-based asset allocation is dead. These theorists propose that global sectors or themes are now at the heart of investment planning. There are very strong cases for the increased global isation of investment. In 1999, for the first time, it was more important to select the right sector than the right country to maximise client return and minimise underperformance.

However, while some ind us tries, such as technology, do support the case for a glo bal approach, other sectors do not necessarily behave globally and, in the previous four years, it was always geographical factors that dominated global equity returns. This is not to underestimate the imp ortance of global research since, even if sectors do not behave globally, many companies still do.

The reality is that both country and sector are important considerations in portfolio planning. Another axis on which robust portfolio planning turns is investment style. As a concept, investment style has been around for a while. However, measuring investment style has not been an easy task.

Traditional country allocation is easy to measure, as is sector allocation. Most funds now present their portfolio with both a national and a sector breakdown. Investment style can be a more difficult factor to define but is no less important. In fact, while portfolio planning theorists have been slugging it out in the argument over whether country or sector is more important, it has actually been more important to be on the right side of the investment style divide.

There are now services – which will be augmen ted next year by the arrival of leading US style analysis house Morningstar – which will bring clear and simple style analysis to the desktops of intermediaries.

The answer to the question of how to manage a robust portfolio does, of course, rely on taking account of all three drivers of risk and return – country, sector and style. An intermediary should not be persu aded to take on unrewarded risk for clients as a result of ign oring any one of these inputs.

The range of over 2,000 investment funds available in the UK, linked with the res earch tools available from Lip per, Standard & Poor&#39s and Morningstar, combined with an intermediary&#39s personal relationship with cli ents, makes for a very powerful way to survive stakeholder.


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