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Majority decisions

Iwas chatting to a good friend of mine who happens to be a long-standing IFA. Over the last 20 years or so, he has built up a business looking after the finances of many high-earning professionals and entrepreneurs.

His client focus has given him an insight into how successful people think and behave towards their investments. I was curious to hear about the varying investment attitudes and approaches of his clients.

In no particular order, the sorts of questions we talked about were:

  • Had there been any noticeable change in clients’ approach to investment over the last 20 years?
  • Did his wealthiest clients behave any differently from other clients with more modest amounts to invest?
  • Once his clients had made money and had a degree of financial security, did they take more risk or less risk?
  • How had the recent credit crunch and related events affected his clients’ approach to investing?
  • Did his clients demand active choice and involvement in investment decisions or did they prefer packaged portfolio-type solutions?
  • What kind of investment propositions would best suit his clients and were they readily available in the marketplace?

    The majority of his views were very much as expected but a few key areas stood out.

    Fewer than 10 per cent of his clients could be classified as active investors, meaning they had regular and proactive involvement in asset allocation, investment choices and fund switches. Most preferred to make decisions that would allow them to forget about their investments for extended periods of time.

    The main reason they gave for taking the latter approach was time constraints. His clients had full-time careers, businesses, professional responsibilities and family life, plus outside interests such as golf or football, meaning they did not have the time or inclination to look after an investment portfolio. After all, that is why they have an adviser to help them choose the best low-maintenance option.

    This differentiation between two main client types seems interesting to me because it is clear that two very different investment propositions are needed. The active, decision-making investor clearly needs a wide range of choice to allow the process to be effective and successful. An open architecture platform that provides access to a wide range of funds from different investment houses is ideally suited to this type of client.

    The majority of clients who prefer not to be active in their investment decisions need a different solution. These clients tend to make an initial investment choice, then review it only occasionally. Unfortunately, when this type of client makes a decision, the risk outcome seems to go up. A flavour-of-the-month fund can be a very good investment if left for an extended period, such as in the case of Fidelity special situations, or a very bad decision, of which there are too many to mention.

    In this situation, the client expects the adviser and the investment manager to make the regular asset allocation and investment decisions on their behalf. For this to happen, the proposition must have the flexibility to change asset allocation and other key parameters accordingly. In the past, with-profits investors were taking this option but with-profits propositions have become less attractive after suffering performance challenges, massive regulatory invasion and reputational damage.

    It is pleasing to see the emergence of modern multi-asset investment solutions. Over the past few years, the implementation of Ucits and Nurs has opened up the investment universe and allowed some very innovative solutions for clients who do not want to take an active role.

    What I find astounding is that multi-asset investment propositions could be a solution to the majority of my friend’s clients. If this is in any way representative of the broader market, then the growth of multi-asset propositions in the next few years could be dramatic.

    Robert Noach is director of financial institutions at Schroders

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