For IFAs offering investment advice the challenges and risks are significant.This has been highlighted recently with the news that trustees of the MG Rover pension scheme are likely to face questions about their investment strategy and reports that a private client is seeking redress against Brewin Dolphin because he claims that his funds were not invested in line with his risk profile. Pension trustees are already in the firing line over competency and review processes, yet they usually have consulting advisers to help them. Where are IFAs in this landscape? After the bursting of the technology bubble and the decline of with-profits, many investors seek to understand the process behind fund selection, risk control and how portfolios are constructed, hence the growth of asset allocation and risk-profiling tools. There are around 7,500 investment management companies and many more funds. Individual fund managers move between them frequently so IFAs trying to pick future winners require more luck than judgement. For example, around five in six funds failed to make the top quartile in each of the last three years in the Investment Management Association’s UK all companies sector. Fixing the asset allocation for a client is tough enough. Trying to find the underlying managers through an acceptable, professional process, keeping them under review and regularly balancing a client’s portfolio is outside the skills and resources of most IFAs. Yet many continue down this route of picking funds, building complexity into their business. Why? Do IFAs believe this is what their clients expect from them? Perhaps IFAs have explored the options and concluded that the best and most effective service they can offer is to do it themselves. Or is there a collective hubris going on here? IFAs want to demonstrate they are professional and add value, yet they choose to do so in the most challenging of areas. Of course, this approach is rooted in a proposition based around finding the right product. Adding value through advice, and charging for it, was rarely considered. However, that world is changing fast. Platforms for administration and the growth of outsourced multi-manager solutions is bringing forward a new business model. The role of the financial adviser, whose relationship with clients and, more important, what clients expect from their advisers, is changing. If all the logic and science points towards outsourcing investment management, why are not more advisers using this model? The answer is that they are too emotionally attached. Many advisers have bought the argu- ment for multi-manager but are still unsure how to add their own value when outsourcing elements of portfolio construction. They are too closely involved with the investment management func- tion and feel that if they outsource and do not have a solid proposition to put to clients they will be left naked in front of them. This is particularly frightening in an environment where the regulator and media are putting the spotlight on commission and clients are being encouraged to ask their adviser what they are paying for. This fear of letting go hinges on some core themes. Some advisers see investment management as their primary role and believe they have the necessary capabilities to research, hire managers and maintain portfolios. Others feel that they are playing in a field which is complex and fraught with danger although they are not quite sure what they should replace this with. Finally, there are some advisers who have bought the logical, scientific and emotional arguments for outsourcing but are reluctant to align to a manager provider because this is relatively new to the UK market and many providers do not have a track record in the local arena. There will always be a big segment of the adviser community in the first camp. A portion of this group, however, will, over time, start to outsource a component of the investment management function to a multi-manager. This will largely be due to cap- acity constraints and the fear of being the victim of a public hanging for malpractice as we become a more litigious society. As well as being a manager of managers’ pro- vider, we offer the Pivotal consultancy service. Our team help advisers re-engineer their busin- esses to increase profitability while improving service to clients. We spend a lot of time with the second group effectively dressing those who feel exposed over their client offering and value pro- position after letting go of the investment management function. This involves, among many other things, building an adviser-to-client process for the business based on a client proposition anchored on strat- egic advice, lifestyle planning and project-managing other aspects of the client’s financial affairs. Advisers generally then feel more confident in having a meaningful, value-added relationship with a client, and charging for it, without doing investment management in-house. Until multi-manager has a longer, local track record, most advisers will use this style sparingly or as a smaller component of a portfolio. But for others, if, in their due diligence of the multi-manager, they can identify that the group are specialist multi-managers and have been running this process in other markets for many years through full-market cycles, they will move closer to this model. Advisers’ concerns over outsourcing investment management are gradually being overcome as advisers align their value proposition towards their core skills.There is no question that we are on the brink of a huge sea-change. Outsourcing is here to stay.
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