The risks of fund picking

The world of financial planning has changed significantly in Ireland in recent years. Back in the day, the core activity was understanding in depth all of the different features and benefits of the huge array of products, funds and investment choices available, and then helping clients to make wise or sometimes lucky choices, with the aim of beating benchmarks.

Today however, financial advisers offer clients a far more holistic and valuable service. Of course, helping them identify the right products and funds is still part of what you do, but this has now become only one element of the financial planning package which also includes lifestyle planning, goal setting, future cashflow planning and management of investor behaviours. Many advisers have recognised that in order to provide a high-quality service to sufficient numbers of clients, it is nigh on impossible to carry out every element of the value chain themselves. This combined with the explosion in the number of investment options available to clients thanks to the advent of open architecture investment platforms has resulted in progressive advisers recognising the opportunity and benefits of outsourcing the “managing the money” piece can bring, and the important and value-adding role that external investment professionals can deliver.

At the same time though, some advisers find it hard to let go of the intricacies of the investment piece and demonstrating your undoubted technical and market knowledge, as this has always been viewed as a clear endorsement of the value added by you.

The winds of change are suggesting it might be time to let go…

Investment decisions can be seen by some advisers as an ‘exciting’ activity, but they are also risky, time consuming and expensive to execute well. The risks run deeper than this, however. Regulators expect a clearly defined process and a very broad base of research to be underpinning investment decisions. These decisions must be made by qualified, competent and therefore increasingly expensive individuals.

Having a highly skilled, experienced and dedicated team of investment professionals working in-house on the construction, management and maintenance of clients’ investment portfolios is the ultimate option. This could be in the form of a client-by-client fully bespoke portfolio, but is more typically a limited range of model portfolios. The reality is that this is only an option for the very largest adviser firms, investment banks and stockbrokers. The irony is that in many cases in large firms, clients typically end up being corralled into a limited set of solutions in order to manage the risk around a large sales team giving inconsistent advice across the client bank.

Where smaller to medium sized firms have attempted to replicate this in-house by constructing a limited range of models or by buying in external consultancy, typically it has led to a very high administrative and compliance burden on the firm and has increased the risk of ‘shoehorning’ as a result of trying to keep the number of models to a manageable quantum.

It is therefore little wonder that more and more firms are seriously considering whether “running money” is really a ‘core’ activity of a financial planning firm.

So, this approach is reducing in popularity as firms become aware of the sheer amount of work involved in running clients’ portfolios on an ongoing basis in-house and the regulatory and business risks associated with it. The time that you allocate to continually developing, monitoring, carrying out due diligence and delivering a robust investment solution can potentially be better employed in more financial planning “face time” with a greater number of clients.

Essentially, the commercial realities of trying to run a profitable financial advice business are changing. The costs of meeting an ever-increasing regulatory burden combined with the potential revenue challenges that may arise in a post MiFID II world and the requirement to demonstrate real value add in the financial planning and client coaching aspect of advice means more and more advisory firms around the world are looking to outsource their non-core activities and adopt a centralised investment proposition.

Letting go does not mean reducing the value you bring to your clients. Instead you are enhancing value for your clients, by exposing them to world-class solutions designed by investment specialists. By also freeing up more of your time to allocate to clients in the areas where you can deliver standout value, the end result is a win-win for both you and your clients.

To find out more about Centralised Investment Propositions, please see our White Paper: Riding the Winds of Change