When Alan Smith started Capital Asset Management in 2005, he was clear that he wanted to build a business of which he would happily be a client.
This meant a focus on clients’ lifestyle goals and priorities, rather than simply selling plans or products. The investment segment had to fit in with that agenda. As with many new businesses, Capital Asset Management was faced with the decision of where to seek external help and how much to build in-house.
The investment management part was a clear dilemma. Eventually Smith concluded that rather than using a fully outsourced solution for investment, they would build an in-house investment proposition but call on external resources to help with its structure and design.
He says: “There were compliance issues in deciding to use an in-house model, but we found that they were not insurmountable. We concluded from a compliance point of view, it was neutral.”
“Intelligent Investing” – the strategy built by the group – moves away from a fund picking, historic performance-led model and instead is tailored to meet the individual client’s objectives.
All the group’s portfolios have an inflation benchmark and from there, the group establishes the average rate of return required by the client to ensure their personal goals and lifestyle objectives are met. For example, they may need a return of 3 per cent above inflation to achieve their desired outcomes.
This is then blended with an assessment of a client’s capacity to take risk. Often, this will lead to a frank discussion about how a client may need to adapt their goals to suit their means and/or capacity for risk.
For example, a client with ambitions for an early retirement but a low tolerance for risk and relatively few assets would have to adapt their lifestyle or adjust their plans. The resulting investment portfolio is then built predominantly using index funds after Capital’s research suggested that there was little evidence that buying active funds was likely to deliver outperformance.
However, although the business keeps control, it has made use of external consultants both on a temporary and permanent basis.
In building its solution, it hired consultants to fine-tune the range and it works with Tim Hale, author of Smarter Investing and chief executive of Albion Strategic Consulting, on an ongoing basis and who, Smith says, provides a useful sounding board and a check on the group’s investment activities.
Capital has an investment committee that sits quarterly and acts as a check on the robustness of the business’s proposition. Hale sits on this committee alongside the apital Asset Management senior team.
Smith says: “We have built a clear investment philosophy, but it is good to have it challenged.”
He says that this has been particularly important in the post-RDR world.
“We have to consider our investment strategies to remain independent. If there is new evidence or information about an asset class, we debate it at these meetings and maintain a clear audit trail reflecting the research decisions agreed.”
Rebalancing will also be under discussion. The business deals with this on a client by client basis, but Smith says that Capital will not rebalance client portfolios unnecessarily and always tries to ensure that its rebalancing policy is fit for purpose. Smith believes that having an investment committee also ensures that the implementation of the business’s philosophy is robust and consistent. He adds: “It ensures that advisers and clients are not going off and doing individual things that would affect their overall strategy.”
However, the business decided that it needed fully to outsource its compliance function. It has been a client of threesixty for several years, which provides basic compliance support, plus regular regulatory updates. Smith says it has been good at keeping the group abreast of everything it needs to consider.
That said, as good as threesixty has been, Smith recognises that it is an information service and someone needs to physically implement the regulatory initiatives. He says: “This posed a dilemma because we need to keep the fixed payroll at manageable levels. We are not at a level where we can support a full time compliance officer.”
The solution has been to buy ‘days’ from a freelance compliance professional.
Smith says: “He makes sure that the things that need to be happening from a compliance front are actually happening. For example, he makes sure we are fully prepared for the annual audit, that we have money-laundering checks and balances in place, that staff training is up to date.”
Equally, for technology, Capital retains the services of an external supplier. Last year, there was a server upgrade and it was a significant undertaking. Having worked with the same technology group for some time, it knew CAM’s back-office systems and made the process relatively easy. Smith says: “They have been a very useful resource to have. We consider them part of the team and they are always at the end of a telephone line or answering email. Like all IFAs, we have specialist software and they understand how this integrates with Microsoft, for example.”
For all the business’s service providers there is an annual review process, which ensures that they are still providing value for money.
For each of them, Smith makes sure there is an ongoing due diligence process and records kept.
Smith concludes: “We have some activities that are the things we do all day long. Then there are the things we do periodically, such as IT compliance. In terms of profitability and applying resource, we want to pay for those services on an as-needed basis. We have to weigh up the fact that we do not have complete control if we want something done very quickly. We recognise that we have to fit in with other work, but that is relatively easily managed.”
Underpinning the advice
Directly authorised/Part of network? Directly authorised
Number of advisers: 5
Number of staff: 10 in total including advisers
Platforms used: Standard Life
Investment strategy: In-house with external consultants
Estimated assets under advice: £180m
Clients: 200 families