We’ve written before about the risks facing advisers where your proposition is based solely upon “running the money” better than your peers. Apart from the risk of your business success being determined by the performance of markets, assets or individual managers, we highlighted the need for a clearly defined process and a very broad base of research to underpin the investment decisions. These decisions in turn must be made by qualified, competent and therefore increasingly expensive individuals.
Most financial planning firms in Ireland today also recognise that your core value is in guiding and assisting your clients to achieve their goals in life, through careful and wise management of their entire financial lives. Unfortunately, this doesn’t allow you the time to dedicate to being that top-quality investment specialist too.
So what do you do? The purpose of this article is to briefly consider the pros and cons of each of the approaches that advisers can consider in delivering an investment proposition to your clients.
The bespoke “client by client” approach
As outlined in the introduction above, most financial planning firms recognise the challenges of managing the investment process yourself, and starting with a blank sheet of paper each time. You simply don’t have the time to carry out the necessary research, stay on top of all of the investment options available and then align these with the individual attributes of each investor. Of course, an alternative is to employ an investment specialist who can fulfil this role for you, but many firms recognise that this is ultimately an expensive route to go, except for maybe the largest financial advice firms that have very large numbers of clients requiring truly bespoke solutions.
In-house model portfolios
In order to avoid developing solutions “client by client”, there was an increase in individual firms designing model portfolios yourselves or with the support of an external consultant. Advisers felt that this ticked a lot of the boxes as the investment solutions typically were not “tied” to a single fund provider. However, the reality proved more troublesome. Apart from in some cases not having the necessary expertise to build the most effective portfolios yourself, many advisers ended up with an administrative nightmare on your hands. You had investors with assets diversified across multiple providers which was difficult in itself. This was then compounded as the model portfolios needed to change and assets needed to be re-allocated. Advisers also had the discomfort (and business risk) of potentially “shoehorning” clients into the minimum number of portfolios, in order to make the process manageable.
There had to be a better way…
Pre-packaged provider model portfolios
As a result of the challenges facing advisers in managing the investment piece in-house, this approach gained in popularity over the last decade. These solutions are straightforward to implement and are easily explained to clients as the portfolios tend to have large brand names behind them. But they are not perfect… It’s very difficult for an adviser to elevate yourself above competitors when using such off-the-shelf offerings. Are they really any different to the fund picking of old? Also, the issue of shoehorning clients into a limited number of options still arises, as there is no capacity to customise the portfolios to meet any individual characteristics of investors. Some advisers have become uncomfortable with the these model portfolios too, as you worry about the actual independence of the choice of the underlying funds that can appear skewed towards the provider’s own funds. Where’s the value-add in that?
Discretionary fund managers
DFMs have definitely gained in popularity as an outsourced solution for clients requiring a truly bespoke approach. Indeed, across the water in the UK there has been an explosion in DFM offerings post the Retail Distribution Review (RDR) as advisers moved towards an “outsourcing” model and focused more on financial planning. Advisers have achieved a level of sophistication and gravitas by using these external experts, though some DFMs again undermine their approach by filling client portfolios with their own proprietary funds. Another challenge that arises for advisers is that that the DFM is running the oft-seen glamorous part of financial management and also looking after the day-to-day administration. You can end up feeling like you’re looking in at this exciting relationship between the DFM and your client! That’s not a nice place to be…
So, what is the best approach?
Hybrid DFM models
At PMX, we believe that you need to take the best features of each approach. The adviser / client relationship is sacrosanct, and you need to be able to get on with your role as your client’s trusted financial guide, while being able to access truly independent investment experts for the right investment solution. As part of this though, you need to maintain the core levers of the portfolio, such as the amount of risk taken and the investment philosophy, further consolidating your ownership of the client relationship. The solution needs to be extremely efficient in terms of administration ease and scalability, to enable you to offer a bespoke solution to all of your valued clients.
We always welcome the opportunity to discuss the opportunities available to you in the Irish market to deliver the best investment service for you, to meet the individual needs of each of your clients. Each method has its benefits, but many have significant pitfalls.
Which is the right one for you?
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