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Power tools

Over the last month, there has been an intense debate in Money Marketing concerning the correct approach to asset allocation. Much of the discussion has focused on the correct interpretation of Brinson, Hood and Beebower’s seminal 1986 work on the subject, The Determinants of Portfolio Performance, and its subsequent updates.

Whatever your views, the diversity of opinion reinforces to me the importance of advisers developing a more detailed understanding of what underpins the various online tools available in the market. The last five years have seen a wide range of tools delivered that enable advisers to measure the extent to which a client’s investments are appropriate to their attitude to risk. In a short time, these have become increasingly sophisticated and their role far more significant.

These services were first deployed as part of product providers’ online services and for the most part were limited in the range of products or funds that they could cover. As such, the number of situations in which they could be used was generally limited.

Most of the organisations involved in building software of this type are used to selling to customers with institutional-type budgets. Such is the complexity of these services that, without the availability of provider support to fund their development, it must be questioned if many would ever have been developed.

The alternative to the use of a provider-delivered service has been for advisers to buy a licence to use such software themselves. In an ideal world, every adviser would source such services independently but this is not a cheap pastime.

In the last few months, I have had conversations with adviser firms which wanted to take this route until they realised they would be looking at hundreds of thousands of pounds in licence fees to deploy their own bespoke version across their whole organisation. Even for a small practice, securing access to such tools is likely to cost upwards of £100 per adviser each month.

Where providers have paid for a branded deployment of such tools, there is a high probability that their own actuaries will have had input to the assumptions that underpin the analysis.

Advisers using provider-delivered tools need to recognise that any results may be influenced by the provider’s perspective of what are reasonable assumptions. This is not necessarily a bad thing but it can mean that if an adviser uses the investment tools of two or more different providers, the underlying assumptions on which the advice is based might be vastly different.

One of the risks here is who is actually giving the advice? There can be no doubt who is responsible for it but if the adviser is accepting at face value the assumptions being made by the provider’s actuaries, could they have difficulty justifying such advice in the event of a complaint to the ombudsman?

Certainly, any complaint that included within it a statement that an adviser based their advice on a tool supplied by a particular provider, without being able to demonstrate control over underlying assumptions, might be likely to come under scrutiny.

Regardless of whether the tool has been supplied by a provider or bought direct from the software supplier by the adviser, the need for the adviser to understand the underlying assumptions is equally important.

As these tools become more and more part of the standard advice toolkit, whoever is supplying these needs to allow for the adviser to be able to justify the basis of advice in the future as part of their service design.

It is clear that in the coming months we will see many more such tools launched to the market and that they will continue to improve the level of sophistication and analysis being put in the hands of advisers.

A number have already been demonstrated to me and when they come to market they will enable advisers to review the suitability of advice given in the past and identify the course of action that is in the client’s interests in more detail than ever before.

I see this as being part of a wholesale move by the industry to validate the suitability of billions or maybe even trillions of pounds worth of clients’ investments. To increasing numbers of advisers, these tools are at the heart of their treating customers fairly strategy.

Overall, I believe this can only be a good thing. To me, it is not dissimilar from the industry inoculating itself from the pandemic of never-ending ombudsman claims that, unchecked, has the potential to be as terminal for the financial services industry as bird flu might be.

This process can identify whether assets should remain in the present vehicles or if they are, in fact, invested in expensive and underperforming products.

If billions of pounds worth of assets find their way into vehicles that deliver better value to consumers, that is a further benefit, but the primary objective must be to identify the most suitable course of action for the client going forward, regardless of whether it involves money staying where it is or moving.

I have never agreed with the mentality that says moving clients’ investments between providers should always be avoided. Advisers do not hesitate to move a client’s mortgage if more attractive terms are available elsewhere so why, if there are more competitive investment providers around, should advisers not move clients to a better option?

If such a wholesale exercise is to be carried out, however, it is of paramount importance that the process can be seen as being transparent and objective.

For these reasons, it becomes essential that the adviser fully appreciates what they are doing when they use such tools and how they work.

Increasing numbers of advisers have been coming to me voicing concerns of this nature. I believe the fact that they are is actually an indication of the importance that they are now beginning attribute to the use and selection of such tools.

For the last couple of months, my colleagues at the FTRC have been working via Adviser Forum with a group of leading advisers, providers and toolset suppliers to identify the elements that advisers need to have greater control and understanding of. This should ensure that advisers are actually in control of the advice process.

I would be happy to hear from any organisations which might want to contribute to this discussion. I can be contacted at or on 020 7863 0863


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