Multi-manager products have been hailed as ideal for long-term financial planning. Yet only 15% of mid-level intermediaries use them for life and pensions products
Each month, in an exclusive survey in association with Incisive Research, RealAdviser will canvass a broad panel of advisers for their views on a wide range of different topics. On this occasion we have questioned 400 mid and top-level intermediaries on their views of multi-manager and how they use multi-manager products.
The questionnaire invited advisers to answer all questions they felt were appropriate to their business. The research aimed to find out if advisers were recommending multi-manager products and if so, which products they were using and the most appropriate use of this type of product.
The report started by asking whether advisers used multi-manager. It then split into two, asking those who did use multi-manager products what they found attractive and those who did not, why they had so far resisted. It then asked those advisers whether they planned to use multi-manager in the near future.
The report differentiated between top and mid-level advisers and extrapolated key preferences between the two groups. The questionnaire also asked who stood out as the best providers in the market.
The world of financial services is constantly shifting. In recent years, advisers have had to contend with increased regulation, the decline of with-profits, squeezed commissions and a prolonged bear market. There is a pressing need for a new approach.
Advisers require products that are sound, reliable, yet innovative. Multi-manager has been hailed as providing a solution to many of the problems facing advisers offering both diversification and risk management. However, many intermediaries remain unsure as to whether multi-manager really is the 'next step' in the finance industry or simply a market fad that threatens their role.
For the first issue of RealAdviser, the Incisive Research team has conducted an in-depth survey with both top and mid-level intermediaries to gather views on how multi-manager is developing. What features do they like and dislike about this burgeoning industry?
One of the key problems is that multi-manager means different things to different people. For this survey, intermediaries were given a single definition on which to base their answers: "any investment strategy, such as fund of funds, fund of hedge funds, or manager of managers, that involves outsourcing investment activity to a number of underlying managers or providing a platform that links to underlying funds in another way (through a life company or fund supermarket, for example)."
Who uses multi-manager?
The report started out by questioning how many intermediaries recommended multi-manager products. Exactly 70% of the 325 intermediaries asked said that they used multi-manager products. There was only modest growth in the largest part of the multi-manager market as fund of funds was recommended by 56% of intermediaries asked compared to 55% six months ago. More notably, however, multi-manager products were particularly popular with mid-level intermediaries with 77% recommending them, as opposed to just 63% of top-level IFAs and discretionary portfolio managers.
Multi-manager products have been hailed as ideal for long-term financial planning. Yet only 15% of mid-level intermediaries are using them for life and pensions products. 36% of the same group preferred to access them through Isas or Peps. Top-level intermediaries preferred to access the multi-manager market directly, with 30% taking that route. In addition, the number of top-level intermediaries who used life wrappers or pensions to access multi-manager was just 6%.
The pros and cons
The Incisive Report then looked at what intermediaries found attractive and unattractive about multi-manager products. The results showed that the majority of intermediaries in both bands found accessing lead fund managers in one package, diversification benefits and also the research and monitoring skills of the multi-manager to be attractive features.
Of the three, diversification benefits proved the most popular as it spreads exposure and lowers risk and few advisers can dedicate the time to constructing portfolios in this way - the survey found 119 of 195 responses (61%) found this an attractive feature. Other areas such as the quality of reporting, consistent low-risk performance, value for money and a reduction in the compliance burden were also seen by the majority of intermediaries as attractive. The only feature deemed "not attractive" was associated life insurance.
Mid and top-level intermediaries were largely unanimous on the positive features of multi-manager. The only discrepancies were that top-end intermediaries liked to access leading fund managers in a single product and mid-level intermediaries felt reducing their compliance burden to be a greater advantage.
The report then examined who are considered the market leaders for both fund of funds and manager of managers. Skandia emerged as the market leader for manager of managers with 27%, followed by Russell (20%), Credit Suisse (10%) and SEI (8%). In fund of funds, 18% rated Credit Suisse most highly, followed by Jupiter (15%), Skandia (13%), Fidelity and New Star (both 10%). In terms of fund of hedge funds, 13% of those asked viewed MAN as the market leader, with Matrix (9%) in second and GAM (6%) in third.
These results show that there is still an educational hurdle to overcome in multi-manager. For example, Credit Suisse does not provide manager of manager funds, Skandia's funds are hybrids rather than fund of funds or manager of manager. Fund providers still have some work to do in explaining the basis of their multi-manager products.
There are still 30% of intermediaries who choose not to use multi-manager at all. The most significant hurdle for providers to overcome is that many advisers believe monitoring and selecting funds is a key part of the service they offer to clients. Many believe that outsourcing some of the investment process constitutes a threat.
A contentious issue
Cost also proved a contentious issue. Out of the 84 intermediaries who do not use multi-manager products, three quarters said cost was a significant factor. By comparison, of the 193 intermediaries asked who currently do use multi-manager, 108 felt it was an attractive feature and 51 felt it was a very attractive feature. It can only be a positive sign for the future of multi-manager that those who are actually using the products deem them to provide value for money.
Less than a quarter of respondents (24%) considered performance to be a very significant reason not to invest in multi-manager, a similar proportion (23%) saw multi-manager's consistent low-risk performance as very attractive.
Looking towards the future for the multi-manager market, only 3% of those participating in the survey have re-evaluated their positions and said they are likely to recommend multi-manager in the next six months. A further 15% thought it was "quite" likely that they would recommend multi-manager in the next six months. However, 38% of those not using multi-manager considered it distinctly unlikely that they would change their view in the next six months.
Although not everyone has embraced multi-manager, it seems that those who have do not regret it. The 70% of intermediaries who use multi-manager seem to be content with the costs and what it provides in terms of risk management and diversification. There is still an educational gap among advisers and some remain convinced that their role is to pick funds and construct portfolios. While some advisers have dedicated research groups specifically for this purpose, the majority are unlikely to have the resources available to multi-manager providers. It may be time for advisers to start reconsidering their roles.
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