The right tool for the job

It seems that asset allocation continues to be the phrase on everybody's lips. Although I don't necessarily disagree with this assessment I wonder how many advisers, and indeed product providers, really understand what they are trying to achieve when constructing an asset allocation strategy. One significant innovation which - although potentially dangerous - has been welcome in the UK market has been portfolio modelling tools.

Recent months have seen significant growth in the availability of these tools in the adviser market. While these tools have generally provided advisers with valuable resources with which to construct (and maintain) client portfolios there are a number of factors that might limit their popularity and usage.

My primary concern is the extent to which advisers understand these tools, and in particular how they are able to differentiate between providers.

Risky business

It is especially interesting to note the link between the risk profiling section and the asset allocation component. Some tools seem to place greater emphasis on the risk profiler, while some do not even include a risk profiler. It is interesting to wonder how these companies have reached the conclusion that advisers have an intuition that allows them to assess risk tolerance but yet require a computer to determine asset allocation. It seems to me that a more consistent approach is required. After all what does a four out of 10 risk score really mean?

Even once risk profiling and asset allocation have been taken care of issues remain.

I have concerns about the asset coverage sitting behind some tools. Whether the underlying fund choice is poor or the underlying funds are just poor funds, there is a real risk that advisers use these tools to build portfolios that underperform and disappoint investors. It is dangerous to expect a relatively modest piece of technology to deliver a comprehensive investment solution for all clients. One only has to consider the sometimes disastrous outcomes from the asset allocation policies pursued by many UK life offices over the last five years or so to realise that this is not a straightforward task.

Portfolio building

In the fund selection component, life offices should make it clear whether they (think they) are adding any value in the distilling the entire market down to the available funds or whether they have merely selected a list of what they think will be the hot sellers. Given that in moving towards open architecture life companies have virtually disintermediated themselves from the value chain, are they actually seeking to reclaim some ground with the choice of fund range or are they merely seeking to guide clients into funds that will generate returns for them?

I have long wondered how much investigation goes into fund selection in semi-open propositions. My suspicion is that the answer is not very much, and if this is the case, life companies are adding very little to the process and advisers should seek a truly open proposition and make their own decisions. It is in this area that I believe we will ultimately see distinction between skilled and unskilled advisers. Once everyone understands that 'products' are entirely homogeneous and effectively low value-added regulatory conveniences, we will come to spend more time on investments and portfolio building. The sooner this occurs, and we shift attention from cost, the better. The regulator has some serious catching up to do here.

Time for change

On the provider side I would love to see some serious innovation in the area of selecting funds for inclusion within certain products - surely there must be the brain power within the industry to deliver something a little more meaningful than an S&P rating?

Given life office expertise in long-term risk why is no-one spending time looking at different funds and their mandates and applying some kind of suitability rating based on the likely duration of the investment? Or indeed creating such funds? The only group that has approached this in recent years was Fidelity with a range of funds with expected 'maturity' dates. While I am not aware of how popular these have been, this kind of theme was the cornerstone of what once made with-profits an entirely appropriate investment proposition. That was before it contracted that terrible 'greed' illness of course.

As ever I guess the challenge falls at the door of the life industry. Only by not dwelling on the problems being caused by depolarisation and treating customers fairly can we see some positive thoughts emerge on the industry's client proposition. At the moment life offices have largely become (not very good) administrators and commission factoring enterprises and it must be time for a change.

If nothing is forthcoming and commission becomes less of a compelling reason for a sale, I fear that the industry's gradual decline will only be accelerated. Improvements in the construction and presentation of fund arrangements would be a welcome step toward recovering some of the ground that has been conceded.

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