Model portfolios, multi-asset multi-manager funds, a mix of both... or neither - where does the secret to success lie? Laura Miller finds out
There are many perils to being an investment adviser.
There are the demands of clients, who want to see their money increase in perpetuity. Then there is regulatory scrutiny with a focus on robust and repeatable outcomes. And last week Jupiter warned of another one – over-diversification.
Modern portfolio asset allocation tools that distribute "something to every asset class" in order to offer diversification could be putting client money at risk, Jupiter Unit Trust Managers director of strategic alliances Neil Carter warned delegates.
Multi-managers versus model portfolios
"This is not necessarily the right thing to do. There should be active balance," he said.
Jupiter offers multi-manager funds that stand in competition to model portfolios and Carter's comments were made at a multi-asset multi-manager event.
But the issue is one investment advisers struggle with – is it better for clients to buy into multi-asset multi-manager funds, use model portfolios, or even apply a mixture of both, or none?
Bloomsbury Financial Planning investment manager Robert Lockie employs models that the firm constructed itself.
"We find this gives us the ability to have some control over the composition of the portfolio and thus the investment experience and cost, as well as avoiding the risk of style drift that is a constant concern with third party managers," he said.
Lockie acknowledges there are some downsides to using model portfolios, but he believes they are outweighed by the gains.
"The risk is that we miss out on opportunities to market time or select sectors or securities. But then again, the evidence shows that nobody manages to do that consistently cost-effectively, so we figure that playing that game is not likely to result in a positive outcome for our clients."
Phillip Bates & Co Financial Services managing director Alan Mellor also favours model portfolios – again the firm creates its own – for one overriding reason; capital gains tax (CGT) avoidance.
"Clients who expect – and hope – to have gains in excess of £10,900 per annum should look to wash out gains by using their CGT allowance each year.
"The use of flexible models allows this as individual funds can be replaced with other preferred funds, using CGT allowance and rebasing that element of investment.
"In a multi-asset fund this gain would be rolled over, normally for several years and, hence, result in a much bigger CGT liability."
Mellor adds that he finds it preferable to select best-of-breed funds for each asset class, based on which one group is best at each, with tactical asset allocation twice yearly.
Model portfolios, however, are not for everyone. Clear Financial Advice IFA Howard Bullock mainly uses multi-asset funds and risk-rated and risk-targeted funds.
"We feel it gives the client a clear choice between passive and active asset allocation," he said. "Although model portfolios will often contain excellent funds, we see the asset allocation to be a little cumbersome."
Bullock did consider putting together the firm's own model portfolios, but stepped away from this due to the additional compliance and administrative work involved.
According to Bullock, the main multi-asset multi-manager funds benefits are the "differing styles of management" that can add real value to a client's portfolio.
"Success, however, depends on the manager getting it right tomorrow and, of course, there is no guarantee of this."
Best of both?
For some advisers, however, there is no need for dichotomy between the two propositions – both can be used at once. Worldwide Financial Planning IFA Nick McBreen uses his firm's own designed in-house model portfolios plus a selected "radar" of other multi-manager and fund-of-funds.
He believes that decision offers the best of both worlds to clients.
Multi-asset funds, he said, bring economies of scale, simplicity of investment strategy and diversification.
At the same time, model portfolios contribute significantly to creating and maintaining a consistent investment process within the business.
However, there is another way – to steer clear of model portfolios or multi-asset multi-manager funds altogether. Independence Wealth Management asset manager Rob Noble-Warren believes the whole point of using a financial planner is that "they are paid to come up with good plans based on good assumptions", and not to rely on either model portfolios or multi-managers.
For him, model portfolios may be of use to IFAs, which he distinguishes from financial planners, as they are an inexpensive way to bring in expertise.
"The weakness is that one doesn't know the quality of the expertise unless you are doing the research anyway," he said.
He is similarly dismissive of multi-managers, saying they are "hugely expensive for the client" and slow to react to market changes.
So what option is best for your clients, and for you as a firm?
The majority of advisers Professional Adviser spoke to use model portfolios, but it will depend on client type, how much they are willing to pay and whether you are looking for a model to adopt or are happy to "go it alone".
From a regulatory standpoint, the key is to fully document the process – whichever path you choose.
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