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Planning for gold

Investors have never been more in need of financial advice. With a savings gap of more than £30bn and rising, investors need a financial plan for how they can accumulate sufficient funds to enjoy their retirement.

But, at the same time, financial advisers are coming under ever more pressure. Regulation has been tightened, professional indemnity costs are rising and the three-year bear market hit sales. The FSA has also questioned the ability of advisers to provide investment advice to clients.

Advisers can escape this apparent maze by providing clients with a comprehensive financial planning service to help them meet their objectives, whether it is to save for retirement, buy a holiday home in the South of France or put their children through university. Financial planners help clients define, review and attain their financial objectives by assessing their overall needs. Changes in one area will affect other areas.

To operate successfully as a planner requires a broad know-ledge and an ongoing relationship with the client. Regular reviews enable the financial plan to be modified as circumstances change. The planner earns a regular fee for his advice rather than only when he sells a product.

Planners are, in effect, general practitioners who look after all the financial affairs of his client while outsourcing parts of the service to specialists. This allows planners to devote the required time to their clients.

Advisers are assisted in moving towards this holistic approach by the Institute of Financial Planning. It offers a range of its own qualifications and runs seminars on how to move a business towards the financial planning model.

The role of the planner as a general financial practitioner is perfectly illustrated in investments. There are more than 2,000 unit trusts in the UK, without including the thousands of investment trusts and offshore funds. Advisers cannot be expected to be able to review and monitor all these funds as well as service the needs of their clients. Monitoring funds is a full-time job in itself.

The situation is made even harder by the frequency with which fund managers switch investment houses. In the first week of August alone, for example, Merrill Lynch Investment Managers, Threadneedle Investments, Baillie Gifford and Old Mutual saw changes in fund managers. As if this did not make life hard enough, later in the month, Insight&#39s multi-manager team led by Bambos Hambi announced it was moving to Gartmore just eight months after they had joined through the takeover of Rothschild Asset Management.

Unsurprisingly, it is estimated that only 6 per cent of funds have the same manager as 10 years ago and 68 per cent have changed manager in the past three years. As another indication that it is not possible to rely solely on past performance, less than 3 per cent of funds in the top 10 regional sectors achieved top-quartile returns in each of 2000, 2001 and 2002.

As general financial practitioners, planners should not be spending a vast proportion of their time trying to keep track of all these movements. By using multi-manager funds, they can outsource investment management to a team whose only job is to review and monitor funds.

This frees up time for planners to spend with their clients and to focus on other areas of their financial affairs. This includes drawing up an asset allocation that meets their clients&#39 objectives and risk profile. This asset allocation can then be used to select the appropriate multi-manager.

In choosing from the numerous providers of multi-manager funds, planners must remember there are three types of products and many different approaches to managing them.

Funds of funds invest directly in the retail funds of asset management firms. Fettered only invest in the funds of their own house while unfettered can invest in all asset managers&#39 funds. This approach allows the multi-manager providers ease of access into and out of funds because, as retail pooled investments, they offer high levels of liquidity.

The third type is manager of managers, which draw up individual mandates for each asset manager to follow through segregated accounts. As the only investor in the segregated account, however, it is not as easy for manager of managers to switch from one underlying manager to another.

Planners must also analyse the investment approach of multi-managers. Look at the degree to which they asset allocate, how they decide to buy and sell underlying funds, their investment style and the risk management discipline they adopt.

Solus MultiManager, which is a sponsor of the IFP, assists financial planners by offering three funds with different risk profiles to meet the needs of clients.

The weightings of the three funds – growth, balanced and international – stay within preset parameters to ensure that they continue to meet the asset allocation requirements of clients. It is up to planners to determine if the risk profile of their clients has changed rather than the other way round.

For example, the growth fund can invest between 45 per cent and 75 per cent of its portfolio in UK equities and has a neutral exposure of 60 per cent. In the balanced fund, UK equities can comprise between 20 per cent and 50 per cent while they are not included in the international fund.

Within these parameters, Solus MultiManager uses its house view to set the asset allocation. Solus takes a styleneutral approach to managing the three funds rather than trying to anticipate when value or growth will outperform.

As part of the risk management process used by Solus, the three funds can only invest up to 17 per cent of their portfolios in an individual underlying holding, they are limited to a maximum of two funds from the same investment house and each underlying fund must have at least £10m in assets.

In assessing funds, Solus evaluates the probability of them outperforming. As well as analysing the consistency of past performance on a weekly basis, Solus also finds “hospital funds”. These are funds that have a poor track record but are undergoing a change that will lead to outperformance in the future, such as a change of manager or an alteration to its investment process. The biggest returns to be made from a fund are when it rises from fourth to first quartile.

On the qualitative side, Solus has in-depth discussions with fund managers and analyses their processes, the quality of their teams and the depth of their teams.

Some multi-managers funds take a neutral approach to their asset allocation decisions and selecting style funds. Others review and reweight the asset allocation on a monthly or quarterly basis.

It is usual for multi-managers to use some form of quantitative analysis, such as the Barra Aegis model and the standard performance data. Where the approach varies is in the form of qualitative analysis used.

One multi-manager considers as many as 80 qualitative issues when selecting funds. These include organisational issues surrounding the fund, the asset manager and the manager, the investment process and personnel stability.

Another approach is to look at whether the fund manager&#39s philosophy and process are being implemented and whether they, along with the manager&#39s skill, are adding value. One consideration for all multi-managers is to analyse if a fund and manager complements the other funds within the portfolio.

Manager of managers may spend more time than fund of funds in analysing the daily trades of underlying managers. This allows them to react to any emerging trends that may affect future performance.

Multi-manager funds enable planners to focus on servicing their clients, outsourcing investment management to a firm of experts and to establish portfolios for clients with a disciplined approach to risk management. By working with Solus MultiManager, financial planners can find their way out of the current maze and offer a comprehensive service to clients.


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