Investment propositions are still largely run in-house despite the increasing popularity of end-to-end solutions that offer advisers more face-to-face time with clients.
Figures from consultancy Platforum show nearly three quarters of adviser assets under management are managed by advisers selecting investments themselves in one form or another.
Firms with assets under advice above £50m are most likely to run in-house model portfolios, keeping more than a third of clients’ assets in them.
Smaller firms with fewer staff and a lower spread of resources are more likely to opt for external offerings. Relying on third-party model portfolios means assets are likely to be spread across multi-asset and multi-manager funds, the research shows.
Platforum associate research director Richard Bradley says: “Demand for advice remains strong, so we’re seeing many advisers making their operations more efficient and they are able to serve more clients.The long-term trend we’re seeing is towards more formalised and structured investment processes.”
Two thirds of firms who participated in Platforum’s study currently operate a centralised investment proposition.
Building a CIP requires advisers to consider how much they outsource and how they then charge for their services. Large firms can often have both a CIP and a separate investment committee. Approximately 90 per cent of firms with assets under administration above £250m have both, Platforum estimates.
A total of 68 per cent of firms surveyed operate a CIP, against just 49 per cent with an in-house investment committee.
EQ Investors director Jeannie Boyle says her business has a team of 10 investment management staff who manage investment decisions between the firm’s advisers and external fund managers.
She says: “Advisers are not always liaising directly with fund managers so it’s important if not to have a strong investment team in place that does that communicating and is making the decisions.”
The use of technology and automation to aid in-house investment decision-making is also continuing to grow, as is the move towards outsourced discretionary management. The research shows 53 per cent of advice firms expect to outsource the management of client assets in the next 12 months, while the entirety of clients’ assets will be outsourced by 12 per cent of companies.
Over half of 300 advisers in another recent survey by Vanguard say most of their engagement with technology is with tools aiding in-house investment decision-making.
Investment reporting, rebalancing and risk-profiling are the jobs most frequently given over to technology, according to the research.
Boyle says her firm takes a hybrid approach to investment reporting, using tools for risk-profiling and portfolio rebalancing. She says: “It’s always got to be a combination of the technology and the human advice offerings. Advisers should not rely fully on automated services when they make investment decisions because there is huge risk in that for clients’ outcomes. Advice is human and so every part of what I try to do in my work has a human overlay.”
Charges and performance relative to the sector are still the most popular metrics for fund selection, with performance the top consideration, according to Platforum.
Boyle says: “It’s good for advisers running portfolios to look at how a fund manager has gone about the selection process, and understand the metrics they have applied and their way of thinking so they have full understanding.”
Historical performance, volatility and risk rating are the other top five selection criteria, according to Platforum’s figures.
Advisers are also increasing their attention to whether fund managers are straying from their mandate.
The findings show 86 per cent of advisers are using third-party research agencies to double-check managers are on track. Boyle says: “Advice firms should engage with the fund managers they are working with if they aren’t happy with how things are progressing, especially when it comes to client specifications like impact investing.”
Platforum findings show implementing ethical portfolios is still proving a challenge to both advisers and investment managers.
What constitutes an ethical investment is highly subjective, often making portfolio construction difficult. Boyle says her experience backs up Platforum’s findings.
She says: “When it comes to impact investing, advisers, investment teams and fund managers need to work together to make sure each party understands each process. There are a few good ethical fund options out there for clients, however.”
Platforum analyst Mariam Pourshoushtari says a combination of regulation, legislation and improvements to available technology will continue pushing advisers to embrace more automated services if they want to sustain competitive investment offerings in the long run.