Frank Cochran of FSC Investment Services talks to Chris Salih about the role of a financial adviser. He believes it is not their business to pick funds for clients as they have neither the ability or the talent, and that 'cherry picking' should be left to the multi-manager system
Frank Cochran, Managing director of FSC Investment Services, says that advisers still cherry-picking funds are doing their clients a disservice. Cochran believes that it is best left to the multi-managers, saying: "If an IFA says it is their job to pick funds, not only is he wrong, but more importantly, he is misleading clients."
Cochran wants groups who are technically solid and who manage for the future. He believes it is this, rather than historic performance, that is the true test of a successful multi-manager. As he says, going by past performance is: "A bit like trying to buy a lottery ticket with last weeks lottery numbers on it. There is simply not much point."
Cochran explains how he has used multi-manager funds for his clients, how it has helped his business and why he prefers manager of managers to fund of funds:
Which clients are most suitable for multi-manager products?
Most clients appreciate the fact that as financial advisers we are trying hard to get away from the illusion of simply being 'fund cherry pickers'. We are not fund managers, it is not our job to pick funds, we are financial advisers and I recommend my clients use the correct asset allocation model to suit their attitude to risk; the only safe way to do this is to use the multi-manager approach within their portfolios .
How did you choose the multi- managers on your platform?
We are currently looking to add to our existing multi-managers. We look at experienced groups, hence us using Frank Russell for the past two to three years. More recently we have started to use the MLC approach. The group has a simple modelling approach plus extensive lifestyle and risk assessment tools, allowing us to make strategic choices of the most appropriate model to follow. This must help in reducing potential losses for clients.
Do you feel financial advisers are sceptical about allowing other people to pick funds? Do they feel it is their job?
If an adviser says it is their job to pick funds, then not only are they wrong but, more importantly, they are misleading clients. Advisers have not got the talent or the ability to pick funds. If they are sceptical about the multi-manager system, it is clear that they just do not understand it.
How do you explain the idea of multi-manager to your clients? Do they readily understand the concept?
We offer somewhat of an education process to our clients. We start by asking a few open and close questions to evaluate what type of arrangement our client requires. Our next step is to establish a detailed risk, reward and loss tolerance profile - this is vital as it is the whole basis of our advice. We need to match the clients tolerance of risk and reward to the correct multi-manager model. Sometimes we have to manage the clients' expectations as they can often come with pre-conceived ideas of what returns they can get for their chosen level of risk. It is usually at this stage in the discussions where we show them what a manager of managers system provides and how different it is to simply picking individual funds. It brings a whole jigsaw of investment together, which will help them achieve their objectives within a very closely defined risk and loss tolerance parameters.
Did multi-manager have any impact on your insurance?
It hasn't yet, but that is largely because a lot of our clients are still being slowly weaned off the multi-fund and fund of funds arrangements over to manager of managers, so there have been no reductions as yet. However, I do see the manager of manager approach as having a long-term positive effect on our PI costs. It will certainly remove the chance of being sued for the mis-management of a fund.
Does it help with administration?
Most definitely. It allows me to spend much more time with clients and allows me to evaluate issues like risk, strategy and overall wrap and platform performance. One problem faced by all advisers is time - I simply do not have the time to monitor every fund manager's performance just in case they go off the boil. More importantly, by the time this becomes public knowledge, it is usually too late to do anything about it.
Why do you prefer the manager of manager approach over that of fund of funds?
It is not really fair to compare these on a like for like basis. Fund of funds has had a far better return because of good market conditions. But the true judgement of a system is how it reacts over time, taking into account all market conditions. The principle behind manager of managers is that they can - over time - manage down the risk inherent within the fund. In a fund of funds scenario the manager has to take some quite serious amounts of risk to get the fund up into the top quartile in performance. If he gets it bang on right, he is a hero, if he gets it just a little wrong; we are the ones who are having the embarrassing conversation with our clients.
What would make you drop a multi-manager from your approved list?
The only real reason would be if a manager was failing to adhere to the fund remit. But I cannot see that happening because the manager of manager system should spot if the underlying managers are failing to stick to their remit long before this ever became an issue.
Do you meet all your managers? Do you regularly monitor them?
We really do put a concerted effort into working closely with all our multi-manager providers and that means meeting with them and monitoring them as often as possible. Because we have a smaller number of people to deal with, we can build a better rapport with the ones currently in the market place and the support we get is excellent.
How do you judge performance?
We do not look at performance. We trust the manager to keep the portfolio within the model structure, and therefore never really get into the discussion with our client where performance is an issue. If the multi-manager is working efficiently then all we need to do is keep the client informed of their strategic position in relation to their goals, aspirations and needs etc, so it could be argued that all I really do is manage the clients returns purely through expectation.
Do you prefer (insist) on a three-year track record?
No. Track record is largely immaterial. I like groups who are technically solid and who manage for the future. The justification for using past performance as a guide to future returns is very flawed. If it were that successful everyone should only recommend Anthony Bolton's Fidelity Special Situations fund. It is a bit like trying to convince someone to buy a lottery ticket with last week's lottery numbers on it. There is simply not much point.
What do you feel are the key factors in selecting a multi-manager?
Experience is a key factor; it is always preferable to choose a group with a good audit trail in place. I prefer groups who are very single-minded - they know what they are doing, are doing what they say, and are well away from 'cherry picking' funds. We target multi-managers whose ideology matches with our expectations and who deliver the service that helps our clients achieve their goals.
What providers do you currently recommend?
As we favour manager of managers as a proposition, realistically we favour them all. We prefer major groups like MLC and Russell, but we are also looking at groups like Prudential, Standard Life and Skandia. In a platform situation we can use who we like when we like and the more players who enter this arena the better.
How do you think the multi- manager market is developing? Are you finding more choice and better products?
There are some good products out there already, but more choice is needed as not as many companies endorse and use the manager of manager proposition as I would like. In April, David Haintz who was recently voted Australia's top IFA, was invited as a guest of Pivotal (the UK sales arm of MLC), to come over to the UK for a multi-manager roadshow, which was definitely a turning point. David's presentations and the efforts of Pivotal woke a lot of people up. Through these roadshows, they have shown that there is a different way of managing money. In terms of choosing manager of managers, this endorsed the methods we had already adopted. There comes a time in everyone's life when they re-evaluate how they do business. For me, this has made ignoring the proposition impossible.
Clients should use the correct asset allocation model to suit their risk profile; the only safe way to do this is to use the multi-manager approach.
IFAs have not got the talent to pick funds. If they are sceptical about the multi-manager system, it is because they don't yet understand it.
FCS Investments establishes a detailed risk, reward and loss tolerance profile for clients and shows the returns they can expect for their chosen level of risk.
Using manager of manager funds helps with administration and ensures that advisers can't be sued for mis-management of funds.
Manager of manager funds reduce the inherent risk within a fund. Fund of funds' managers have to take higher risk to boost performance.
FCS Investments looks for experience, a single-minded approach, an ideology that matches its expectations and good service.
The group prefers larger providers like MLC and Russell, but also looks at Prudential, Standard Life and Skandia.
Underperformance still present – for now
Regtech or fintech
15% increase in number of claims paid
Open architecture philosophy
Inflation above 2% for first this this year