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Stand out from the crowd

Robust portfolio planning requires more than a broad fund choice

Fund supermarkets and platforms have proved to be capable of delivering improved efficiency, better service and transparency for advisers.

There are many additional benefits for advisers and clients, including increased investment choice, the option to select from a range of third-party managers and flexibility in asset allocation, with possible detailed alignment with the client’s risk profile. There is also competition on charges at fund and wrapper level.

This is a big improvement on the days when with-profits and managed funds were seen as a catch-all solution on the basis that it was the wrapper that made all the difference.

Platforms delivering via open architecture typically offer between 800 to 1,200 funds. Not surprisingly, it is the breadth of fund choice that is perceived to be the key differentiator but is this really offering you and your clients a better proposition?

The reality is that the strength of the underlying investment story should be the focus of differentiation. This ultimately determines your client’s satisfaction. Surely, there has to be some rationale behind the selection and construction? Like many things in life, it should be quality, not quantity that counts.

The downside of having so many funds available is the vastly increased business risk of advising across enormous fund ranges, with little or no guidance on what is suitable or relevant for each client.

This is at odds with the cumulative impact of many of the current FSA challenges which, when you cut through the detail, all boil down to a single goal – ensuring the customer ends up with advice which presents a solution specific to their needs, objectives, circumstances and expectations. This leads to another dilemma for advisers, who not only want to ensure they stay within the rules but want to do the best for their clients. Even staying within the rules is not as simple as it used to be.

Principle-based regulation will be rigorously enforced where positive consumer outcomes are not shown clearly. The main stick to enforce this will be substantially increased capital-adequacy requirements. To quote a recent Money Marketing article, increasing capital adequacy could have the effect of “incentivising firms to move to business models that involve less risk of poor outcomes for consumers”.

There will be a sweetener in the form of a regulatory dividend, rewarding better controls and processes for advisers who can prove improved outcomes for clients. So there is another reason to look at the way investment advice is provided for individuals.

Whether you are an asset allocator, fund picker, a fan of funds of funds, a user of investment panels, risk-graded managed portfolios or a subscriber to specific asset allocation and portfolio planning tools, makes not a jot of difference. If you cannot show that you have treated each client as being unique and advised them as such, you will not be getting it right – and the penalties are getting greater with every piece of the FSA principle-based revolution.

Platforms need to ensure they have a strong investment story for advisers, whatever their investment advice model. Access to fund managers alone is not enough – access plus appropriate guidance is the key. Where this supports delivery of the most suitable asset allocation and fund selection aligned to client risk tolerance and expectations, this guidance is where significant value can be added.

Whether in the form of robust portfolio planning and building tools, best of breed investment panels, independently constructed portfolios or simply independent research, such guidance should help to cut through the relatively meaningless measure of past performance or funds picked from sectors that can be so broad as to make any comparison meaningless.

Advisers should not take on all this responsibility unless they are aware of the implications and are qualified to do so. Platforms should be looking to use quality, independent research with processes geared to deliver client suitability. Only in this way can we keep the FSA happy while building long-term client relationships within our businesses.

Jo Smith is a consultant with Old Broad Street Research and Teamspirit


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