Nice to see you, Mr Fox. I’d like to have a chat about your pension investments and see if we can construct something that suits you. What do you fancy?”
“Tell me about yourself.”
“I like chicken.”
Not a great place to stop a fact-find but strangely enough, in the new world-wide pool of pension investments, not a problem.
Rural Funds Management Limited offers a Chicken income fund. The main assets consist of 10 chicken broiler farms, Each farm has 10 broiler sheds, with the exception of Farm 53, which has 20 sheds, making a total of 110 sheds owned and operated by the fund. All 10 farms are at Griffith within eight kilometres of Bartter’s processing plan in Australia. The fund recently acquired an agricultural property known as Farm 1390 to expand the fund’s chicken activities. he fund intends to construct up to 24 new broiler sheds on this property over the next three years, which will be grouped into two new farms, Farm 67 and Farm 68.
Stick that in your portfolio planning tool and smoke it.
“That’s great Mr Fox, a solid starting point. Perhaps we can build on this to construct a diversified portfolio that would meet your needs for long-term investment growth in excess of inflation.”
Alcohol, gambling and smoking wasn’t the direction intended, yet there was an investment fund that met the challenge – the Vice fund.
“What we need to consider is past performance and the fund manager rating”, says the adviser, trying to rule out this fund.
No cigar. The Vice fund returned 18.2 per cent average annual return over the last three years and has a fivestar rating.
A portfolio constructed in this way can soon get out of control.
Pension investments which are not well managed are in more danger than ever of getting out of control.
IFA advice is critical but advisers may find themselves spending more time than planned in researching the market and monitoring client holdings. Everyone agrees that asset allocation is the most important factor for investment suitability. It needs to be nailed and documentedProduct providers have a responsibility to ensure products are designed and operated to be suitable for clients.
Our most recent experience with this has been Pension Portfolio, designed for the Sipp market but also having to provide good value for policyholders who do not use the self-investment option. For them, and for their advisers, it is vitally important that the investments available can be trusted to do a good job. Treating customers fairly applies to all aspects of the product. Suitability should extend beyond the point of sale to encompass the entire product lifetime.
At one end of the spectrum, many people view the discretionary fund management approach as being an “ideal” high-quality solution.
For a client with, say, £250,000 to invest, a discretionary fund manager will design and invest a bespoke portfolio on behalf of their client, based on sound asset allocation. They will maintain suitability of that portfolio by regular reviews and rebalancing .
Some IFAs have developed a similar approach for high-net-worth clients. For other advisers, it can be difficult to justify the development of specialist investment skills and the time taken to conduct the regular reviews that are essential to this model.
An attractive alternative may be to work with providers which can provide partial or full support models to enable a DFM-type approach to be available for all clients – not solely the high-net-worth.
It needs to focus on the asset allocation process and this needs to be ongoing so proper governance processes are needed to ensure the approach delivers the intended outcomes.
There is also a role for radical thinking on fund or stock selection. The alternative of providing customers with an ever-increasing number of funds is unlikely to be of any value to the typical individual, who is probably going to be confused by a vast choice of funds, with no governance regarding their ongoing performance.
Evidence indicates that for hybrid Sipps, we can expect around 90 per cent of customers to initially be invested only in the core insured funds. It is likely that many of them will remain in the insured funds throughout the plan lifetime so it is essential for providers and advisers to ensure the core proposition is good value and offers strong and appropriate investment options.
Barry Shields is head of individual business at Scottish Life