In his closing speech Dave Ferguson explained how he believes the market should address the strategic decisions it has to make
"I would ask that you throw to one side any preconceptions on how the market may evolve (or even revolve) over the next few years. My aim is to take you through my thoughts on how this market should operate to best deliver client value while also generating shareholder returns.
Crucially I think that the market is facing the deepest strategic decisions of the past twenty years or so. The entire focus of the market must be to transform itself from the current transactional, product-led approach into one where clients benefit from a long-term service proposition, delivered by advisers who are pretty much aligned with the client interest.
To my mind once there is market knowledge, successful businesses can only operate on a principle of alignment with the real or perceived customer interest. I often reflect on how distant this is from today's reality. After all, what is so funny about peace, love and understanding?
This is of course some way from the traditional model in our sector. This is best explained by reference to game theory. American actuary Jim Anderson developed the principles of profit testing around game theory in the late 1950s. One of his early conclusions was based on the premise that in any three-person game, two of the participants would collude against the third. It is my assertion that the UK life industry has prospered by colluding with the advisory market to exploit, or at least not lose out to, consumers. In doing so it has created a position of such misalignment that none of us should be shocked by what is sometimes judged as severe regulatory intervention.
The future market is about shifting the adviser's stance such that he or she becomes aligned with the consumer, a shift that I believe will drive dramatic structural and financial changes to the industry.
Bearing this in mind let us consider how such a transition might be effected. Hopefully in my role as a consultant to many parts of the market I can speak without vested interest or indeed any concern over when my next bonus payment might arrive.
To my mind there are several factors currently restraining the development of the life & pensions and asset management sectors. First, there is a structural imbalance about capital. The provider side has been careful to only allow capital to flow into the IFA market at a tightly controlled rate. Although there are clearly exceptions, this has prevented IFAs from properly taking control of their own businesses and creating value across the sector.
Secondly, and this will probably shock many of you from the provider side, there is little or no real knowledge of IFAs and how they operate. Furthermore the senior management of many companies suffer from dreadful weakness, and there are certainly some examples of where management could be accused of failing to act in the best interests of shareholders (or policyholders in the case of a mutual).
A further negative is the incredible fragmentation of the distribution sector. I can't help laugh when I hear people claim how mature and developed the UK retail market is. The reality is that if the full duration of the industry is a calendar year, we are suffering the back end of a very severe winter. Maturity is five to ten years off.
What are IFAs looking for? At present the big life offices negotiate enhanced terms with fund management groups and then spend any economic gain on ramming substandard propositions down the throats of disinterested IFAs, leaving the client pretty much neutral on price. It seems utterly bizarre that life offices are able to negotiate terms with IFAs' clients' money and then misdirect the savings so badly. The position is similar for client interests.
Although values fluctuate daily and I did these sums some months ago, I understand that one could pretty much purchase the entire UK life industry for about £100bn. Now get this! An investment-banking associate of mine undertook an assessment of the UK IFA market last year and concluded that he could buy the entire sector (or at least the meaningful bits) for a comparatively pitiful £500m.
Can it really be that a sector that relies almost entirely on IFAs for new business and maintenance of client relationships, and owns very few client relationships itself, is worth 200 times the value of its distribution? Is there another industry where such a claim would hold up?
I judge that the industry is about to experience a revolution with the emergence of wrap behaving as a fast-acting catalyst for a period of change that will be unlike anything we have ever seen before. Now I am well aware that an excessive number of column inches have been wasted on wrap and not much has happened yet but to believe this situation will perpetuate is deluded, as the drivers for change are becoming more and more powerful every week.
Correctly executed, wrap provides an opportunity for IFAs to gain appropriate value for their efforts over the last 20 odd years by building proper process into their business and beginning to generate a greater volume of recurring income on existing client portfolios. It is surely clear that there is opportunity to cut back office costs through adoption of new technology and work practices. With regard to the client benefit the upsides offered by consolidated advice and transparency cannot be overstated, particularly given the complexity of the market and the general lack of client knowledge.
Before we get carried away by considering the many reasons why wrap will succeed we must not be so foolish as to ignore the negatives. Firstly there may just not be enough value in the client to invest the time in wrapping their assets. Harsh but true.
There are also legacy issues around about taxation, product charges, ongoing contributions, renewal commission, death benefits, market value reductions and in some cases the very structure of the underlying product that mean that wrap is either not appropriate at all, or at the very least is not straightforward.
For some IFAs there are massive problems to be overcome in managing the cashflow of the business while the firm moves from a transactional to a service-based model. Although I wouldn't be surprised to see some of the bigger players assisting in this regard it is a dangerous game to play, and I wouldn't be surprised to see serious volumes of cash disappearing into some of the blacker holes in the IFA market.
In order to assess why wrap is such an important catalyst for strategic change, we have to begin by considering just who is adding what to a client. Without getting too deep, just why do we all exist?
I think it is pretty clear that the adviser is certainly taking care of the client ownership and management - probably just about the most important component in all this. In addition, the IFA will typically take on the responsibility of managing the tax structure of the portfolio - whether assets are invested in pensions, Isas or bonds for example, and also whether any of the client's assets are held in trust.
Depending on the IFA's investment expertise and access to suitable tools, he or she may or may not take on the important risk profiling, asset allocation and asset selection functions. The big question in all this is where is the life office? Although they may have some role in the management and regulatory reporting of some tax wrappers and in the production of niche high added-value products, their role is greatly diminished.
This model, and indeed wrap, recognises that product manufacturing is a commoditised, low-margin activity in a modern transparent world. After all, and apologies for any offence, the long-term effect on a client's portfolio of charging structure junk such as bid/offer spreads, allocation rates, loyalty bonuses and such like is negligible. All of these so-called features are themselves legacy, as they exist to create the illusion that the client is paying less for a service than they actually are.
Having long since foregone their appetite for taking on or managing investment, mortality or morbidity risk, most life offices are now little more than administrators and commission-factoring businesses. If the importance of the latter is diminished by a change in commission structures, they will be left being not very good administrators - hardly a roaring business concept! In some cases they may also claim to be negotiators on asset management costs, a point that while valid, fails to point out they are only negotiating with IFAs' clients' money, as I explained earlier.
I think it is clear and is now probably widely accepted that there will be a big impact on new business levels from wrap. The less obvious impact is on the existing book. My feeling is that the shift of this will be geared by the effect of A-Day
My expectation is that wrap, and particularly the legacy business associated with wrap will have a huge impact - one only has to consider the acceleration in penetration being achieved by companies such as Transact and Selestia to know that notwithstanding the logistical difficulties around transferring legacy assets, this is all becoming very real, and all at the same time that costs of market entry are falling.
While some life offices will undoubtedly seek to raise barriers and may even follow their typical path of offering financial incentives to deter leavers it is unlikely that they have the capital base these days to make a significant difference if the IFA community shows sufficient will.
Earlier on I mentioned the mis-match in aggregate capital values between traditional providers and IFAs. It seems to me that wrap provides the opportunity for IFAs to redress the balance. If an IFA can provide a better client service at a similar or lower cost, and begin to generate revenue from clients who are currently just costing money, the impact on value should be considerable. Not only does the IFA operate more strongly from a cashflow perspective, it also shifts the emphasis away from initial commission toward recurring annual fees and encourages alignment of interest between the IFA and the client.
Numbers I have seen suggest that if a decent IFA can identify and wrap his or her 80 to 100 most valuable clients they may be able to re-engineer their business completely such that the reliance on new clients is significantly diminished, a transition to trail has been achieved and the IFA has hugely geared the value of his or her business.
Back to the timebomb from earlier. If we accept that there is significant latent value for IFAs in their existing client banks, what better catalyst for IFAs to help unlock that value by identifying and 'wrapping' their valuable clients while effectively parking the burden of the lower value and tricky clients back onto product providers? The combination of A-Day and the practical administrative assistance being offered by the new wrap providers feels like a pretty lethal cocktail.
From where we are now, I can see a nightmare scenario for the life industry in that it is left with a sick looking book in which all of the assumptions that have been made regarding persistency and embedded value may have to be thrown out the window and the value of the entire sector re-appraised. If one then gears this effect with the shrinking manufacturing margins that can be expected to emerge from tied/multi-tied business the future looks bleak and we could see a realignment of values along the lines shown.
This is perhaps the least debated yet the most important issue up for grabs in the wrap market. Just what is the most effective business model? At the more radical end we have advocates for IFA-owned and controlled platforms, whereas others see mileage in provider-led propositions. I tend toward the former as once one accepts that product, or tax-wrapper, manufacturing is a highly commoditised activity, a wrap service is really only a marketing and administration hub for IFAs, linking their clients to asset managers and encouraging collective bargaining. This is some considerable distance removed from the traditional packaged product model we have been accustomed to.
In summary I see only bad news for the life industry (except where higher margin niches can be successfully exploited). I expect to see fund managers being forced to operate on substantially reduced margins, although many may become more profitable in doing so, and I anticipate opportunities for those IFAs that are successful in implementing a service-based proposition around about the nucleus of an IFA-owned wrap proposition.
"It is quite difficult to find out how much money is invested in the multi-manager market, but Cerulli Associates - generally regarded as the best source - put the figure at around £48bn in the UK. What is most impressive is the rate of growth. The market is three times the size it was three or four years ago. Of this, around two-thirds is in manager of manager funds and one-third is in fund of funds.
But let's put this into context. £311bn is invested in unit trusts and Oeics. There is a vast amount of money invested in insured contracts - individual investment bonds, personal pensions, annuities and whole-of-life contracts. Multi-manager has a big pie to go for. In 1994, the ABI reckons some £90bn was invested in insured contracts, almost double the size of the multi-manager market.
Who are the big players? We have dug around and found about two-thirds of those assets. Abbey is in fact the biggest multi-manager player in the UK. It is a great big advert for multi-manager that Abbey decided it wasn't able to generate outperformance with its own internal team. Fidelity came into the market relatively recently and has now raised £200m. The fact that such a big player has thrown its hat into the ring shows there is still a lot to go for.
More importantly - are these multi-managers any good? We assess manager of managers and fund of funds and we believe the majority add value over their objectives. We looked at the percentage of multi-manager funds that outperformed their peer group. This is simplistic but it gives you a guide. And roughly two-thirds are delivering. But you still need to be discerning about which one to use. The picture is consistent across the balance managed, cautious managed and other sectors. Multi-managers are justifying their existence.
Why is multi-manager making such an impact? The failure of with-profits is important. In the 1990s, IFAs put a lot of store on these products, believing they were a good way of investing. But when push came to shove, they didn't work. It is this poor performance from traditional managed funds that has pushed people towards multi-manager.
Also there has been a realisation that no fund management group is good at all things. Once the asset allocation has been done, a multi-manager can select the best funds across the market. I have never met a chief executive of an asset management company who could look me in the eye and say that they are good at everything.
There is also the tough regulatory environment. It is now not enough for an adviser to say they research and pick the best fund. The regulator wants to know how they research the market and give advice on funds. This is not their key strength. Intermediaries' strength is in talking to clients, diagnosing their needs and making sure investors are in the right tax shelters and products. This is a different skill to assessing the worth of fund managers. The growth in multi-manager demonstrates the separation of those two roles.
We at OBSR have 20 people involved in the analysis and research of funds. To recreate that in an IFA firm is expensive and takes a long time. Each multi-manager is employed by five or more individuals to analyse the market. They are expert in picking managers and blending investments. IFAs don't have that skillset.
There is also a lower margin for error now. In the raging bull market of the late 1990s noone cared if you were underperforming the benchmark by 2% because investors were still getting 20% compound returns. An element of poor advice and poor fund selection was covered up by high absolute returns. The received wisdom is now that we are in a low growth, low inflation environment. People expect returns to be high single digit. If you underperform by 2% there, it's a lot more painful.
What type of multi-manager? People sometimes don't make the correct comparisons. There are fund of funds, hybrids and manager of managers. But the type should not necessarily dictate selection, because there are pros and cons of each. The evolution of a multi-manager will probably start with a funds of funds because there is not sufficient critical mass for a manager of manager approach. But as a manager of managers, for example, you may not get access to all the retail fund managers, and that works both ways. Manager of managers is necessary if you need scale. So the type of approach will depend on scale.
I think cost is a bit of a red herring - many would argue that you get what you pay for. It shouldn't drive decision-making. Manager of managers tend to be cheaper, but are also less ambitious in their outperformance targets. They are also more scaleable. But it doesn't make them better investments.
It helps if you can get into the right mindset. For example, are you outsourcing asset allocation? Generally in the retail market there are three approaches, though this will be clouded by Ucits III.Firstly, there is the fixed asset allocation with a relative return bias - this is Frank Russell, SEI, Skandia Investment Management. They will assume you have done the asset allocation and will try to add value, remove some volatility and monitor managers.
The second is the most prevalent approach, certainly in terms of number of providers. This is the asset allocation relative return approach. This tends to be the equivalent of the old-style managed funds. They will aim to generate the majority of their returns through fund selection, but will augment that with a bit of asset allocation. Examples of that are people like Credit Suisse or New Star.
Finally you have the active asset allocation, absolute return mindset, like Jupiter or Miton. Not only are you asking them to select the funds, but they will also try and aggressively asset allocate to generate more of the total return. They are more likely to have a cash benchmark. Many intermediaries fall down by not making the distinction between the different styles.
Finally, I'd like to talk about some of the attributes we look for when analysing this market. There are over 200 multi-manager funds now available. You have to demonstrate a process for choosing your multi-manager. We think it's similar to how we look at individual managers. It's important to remember when you are selecting a multi-manager that you are outsourcing control of the investments, you are not outsourcing responsibility. You need to exercise a degree of diligence in choosing your multi-manager.
The most important thing we look at is the experience of the resource. It is quite a new asset class and there are not many people with experience of one or two or more market cycles, and not many people who know fund managers well enough to know how they will behave in bull and bear markets. With asset allocation, you should also be looking for a clear process and a clear philosophy. It is the hardest thing to do in investment.
There needs to be a process for identifying and selecting funds. That is a very labour-intensive process. There also needs to be a process for monitoring managers and a process for optimising the portfolio. They need an understanding of risk and how to control risk.
In summary, the market is growing rapidly and there are many drivers for growth, many reasons to support the asset class. Many are pretty good, but they're not all good, so you need to be careful. There are also lots of different types available, so you need to be sure that the approach you are picking is appropriate to your clients. Choose your multi-manager carefully!"
Reconnecting with the client
In his address to the forum, Peter Smith, head of IFA distribution at MLC, outlined the Australian group's approach to financial advice. MLC is the third largest manager of manager group in the world and is part of the National Bank of Australia. It has been established for 20 years in Australia and owns and operates five of the ten largest adviser firms. The MLC solution is designed to plug into an adviser business and help it run more profitably.
Smith believes that there is a disconnection between where advisers spend their time and where clients want them to spend their time. Clients want advisers to spend their time on relationship management, while a lot of advisers are still sitting in front of spreadsheets analysing funds and fund managers or on plan preparation and administration. It makes good business sense to outsource.
Smith believes it is about converting fixed costs to variable costs - this is good for the adviser's business and good for the clients. Advisers spend time on the ongoing relationship with their clients.
This has been a huge change in many advisers' business models in Australia. They have started anchoring their businesses onto wraps and platforms and increasing ongoing revenue. Previously these business were receiving 40-50 bps in trail commission. They are now generating 100bps. The adviser is coming out of the transaction much better than other providers. Outsourcing investment management can release capacity at the front end.
Smith recognises that such a shift in a business model can be daunting and advisers can feel naked in front of clients. MLC works with Pivotal to help advisers change management and also to have tricky conversations with clients. Its proposition is about making sure clients' investments fulfil their lifestyle goals and that the adviser can justify charging an ongoing fee.
Smith says the biggest impact advisers can make is in the strategy and advice component of their business - cash flow management, risk management, debt management and pensions management. If advisers get taxation wrong it can cost clients 40%, if they get fund management wrong it can cost 2%. Technology cannot commoditise the relationship management area of an adviser's business, whereas it can commoditise manager blending, portfolio blending and asset allocation.
Advisers also need to look at their front-end sales process, which has to be as efficient as possible. Advisers don't have time to select a specialist team of portfolio managers. By outsourcing, everyone is doing what they are best at. MLC and Pivotal will show what steps need to be taken for a financial planning business. Smith says it is about stripping out the low value-added tasks. That way, advisers can spend more time with clients and charge a higher ongoing fee.
Wealth retention is the key goal
Skandia Investment Management (SIML) is the fastest growing asset management group in the multi-manager space, having just reached £3bn, Spike Hughes told the forum. The group decided to launch this business because it believed the market was going to move in this direction. It also thought there would be a huge supply of providers with similar products so wanted to be innovative. Most offer both manager of managers and fund of funds - SIML decided to set up a hybrid.
Hughes, sales and marketing director at the group, believes wealth preservation is the key goal for most clients. Investors with smaller pension pots can't afford to take risks and wealthier clients don't need to. Hughes says part of the growth in multi-manager is the amount of risk advisers are taking. It is an asymmetric bet with the downside - erosion of the value of the business, drop in income, loss of reputation - much more significant than the upside.
The key thing for investors is to avoid the rollercoaster. They tend to put money in at the top of the market or when it becomes available. It is easy to destroy savings-- technology funds were the ultimate in fashion investing. It is more difficult to preserve wealth.
Fund selection is a tricky skill. For example, it is often not apparent on the label that investors are buying a specialist fund. Growth funds were often technology funds. If an investment falls 90%, investors need 900% growth to get back to par. Although this was five years ago, there are recent examples. Hughes also gives the example of top-performing UK funds with a large weighting to mid-caps. These may have performed well against the All-Share, but should be compared to mid-cap indices to see whether the manager is adding value.
Hughes says advisers need to decide whether they want to outsource asset allocation. The group has built its asset allocator range to accommodate advisers who want to do their own asset allocation. Advisers decide how much money goes into fixed interest or the US and SIML fills in the boxes. These can be segregated mandates or funds. Skandia will ensure portfolios are properly balanced rather than skewed towards fashionable funds. Hughes believes this does not provide index-tracking returns because there is not enough stock overlap. He says SIML can offer investors a full solution or a way to retain some control over asset allocation.
Answering the outsourcing critics
Craig Heron told the forum there are six statements that are frequently used against multi-manager: "I just buy consistent managers with good three-year track records"; "fund selection is easy"; "good stock-pickers always beat the index"; "multi-managers are too expensive"; "multi-managers all perform the same" and "if I outsource where is my added value?"
On fund selection, Heron says advisers often just use past performance. He points out that there is a lot of academic research that shows past performance doesn't persist, though bad performance does. A manager's track record has to be about 16 years before any skill can be attributed. Looking at the IMA equity sectors, around one in 20 funds beat the average consistently over five years. If funds do consistently beat the index, they are difficult to identify.
Heron has looked into equity risk to try and establish whether good stockpickers really do consistently beat the index, which has become an investment mantra. He found that the average equity risk in the portfolios examined was only 45%. Investors therefore need to be careful what they are buying and that managers aren't taking risks in areas advisers don't know about.
Is multi-manager expensive? It usually costs around 1% extra. Yet there is a huge difference between the best and the worst funds - up to 80% in some sectors. Heron believes expenses aren't really the key issue. The difference between multi-manager funds can be as great as for straight equity funds. Multi-manager is a good solution for increasing regulatory pressures and performance can certainly outweigh the extra expense. The critical factor is how funds are selected and monitored. That demonstrates real added-value.
The important thing for a multi-manager is process. It needs to be clearly defined and well-resourced. The multi-managers need to have longevity, they need to be risk aware and they need to be return-focused. The process has to adapt to changes in the market cycle - there is always an economic cycle, a business cycle and a market cycle. Different styles and risk factors are rewarded at different times. The key is to adapt and blend - Heron believes multi-manager vehicles are perfect for this.
Asset allocation is a very important driver of returns, but can lead to high volatility. An active approach is very important. When selecting a multi-manager advisers need to know what sort of outperformance targets a manager is looking for, the impact of fees and the risks involved. The end goal should always be consistency.
Are managers using their brains?
John Chatfeild-Roberts told the forum he believes active asset allocation is a moral obligation for multi-managers. The head of Jupiter's independent funds team says clients hand over money with the reasonable expectation that a fund manager will use his brain to earn his fees. He challenges other multi-managers to explain what they are doing if they are not actively asset allocating, particularly those who derive asset allocation from the sector average.
Chatfeild-Roberts divides asset allocation into geographic and thematic. For geographic asset allocation, he looks at the 1990s when the US markets dramatically outperformed Japan. For top performance, investors simply had to be overweight the US and underweight Japan. Most pension funds had similar exposure to each area and did very badly. Chatfeild-Roberts believes this is a direct consequence of looking at what everyone else does and following it. Over the last few years Europe and the US have been the places to avoid.
But investors need to make sure they are not missing out on other opportunities. If advisers insist on a fixed geographic weighting, would that leave room for a fund like the Jupiter Financial Opportunities fund, which has been a top performer?
Chatfeild-Roberts believes investors must look long term and must look hard at what is actually happening. For example, last year no-one expected the oil price to remain high. The BRIC countries (Brazil, Russia, India, China) currently have 2% of the world's stock markets but 50% of the world's population. These are long-term trends that investors need to accommodate.
There are also opportunities to be made in the short term. Chatfeild-Roberts says turnover is only expensive when you get it wrong. He gives the example of the period of time after the outbreak of the Gulf War when investors were worried about Sars. The Jupiter team altered its portfolios and it made 25% to 30% difference.
Chatfeild-Roberts believes active investors should be grateful to passive and quasi-passive investors for providing opportunities. The effects of following sector asset allocation are shown in the tight grouping of some of the major sectors. He says investors need someone who is taking a view on asset allocation. They need to look at whether managers are using their brains!
Multiple assets a powerful tool
Patrick Armstrong, director of fund and manager selection, told the forum that the UK Non-Ucits Retail structure is a welcome move from the FSA. He has been in discussions with the FSA for some time over the inclusion of alternative asset classes within retail portfolios. He believes that while retail investors don't have the expertise to buy hedge funds, they shouldn't be prohibited from owning them.
Armstrong says the use of multiple asset classes is an important and powerful tool for the multi-manager. It can diversify risk and compound absolute returns. Of the various alternative asset classes - private equity, property, managed futures - each has its own benefits and drawbacks. Armstrong argues that multi-manager needs to exploit each for maximum efficiency. For example, using past performance, equities have delivered the highest returns, but with the highest risk. Corporate bonds have delivered lower risk but lower return.
The inclusion of, say, commodities or property can increase returns and decrease risk. Armstrong says hedge funds have a place, but are not the sole mechanism for this type of portfolio. They are illiquid and can have extreme event risk. For example, during the Gulf war or the Asian crisis, hedge funds tended to all move down at once. The Insight team has found ways to manage this risk out of the portfolio and back-testing has shown that a multi-asset portfolio structured along the lines of the Insight Diversified Target Return fund would have avoided the event risk of hedge funds.
The Insight Diversified Target Return fund aims to use the risk premium of each asset class and generate stable returns. The portfolio aims for a return of cash +4%. If it achieves that it will have beaten equities. The fund has now raised £30m and will now be backed up by a Sipp campaign.
Making strategic and tactical moves
In his speech to the forum Rob Fisher, head of sales at Fidelity FundsNetwork said there is a trend for advisers to look at which parts of their business can be outsourced. Strategic and tactical asset allocation are possible areas. Strategic asset allocation is high level asset classes - equities, bonds, fixed income, cash - and these are the main drivers of performance. The other is tactical asset allocation, which is geographic and sector exposures. Tactical is less influential than strategic.
Various academic research including Brinson and Ibbotson & Caplan, have looked at asset allocation. This suggests that when choosing between funds, stock selection becomes quite important. But much of the variability of returns over time is down to strategic asset allocation.
The advice process is all about understanding a client's risk and matching it to achieve its goals. For the liability aware adviser, strategic asset allocation is a vital part of the future advice model. It is fundamental to the advice process whereas tactical influences short-term returns. Fisher believes advisers can't delegate or outsource strategic asset allocation, though many delegate tactical asset allocation.
What do clients care about? Do they care whether fund x has beaten the index? Fisher believes they may care in the short-term. He says they are more concerned with whether investments meet long-term savings goals. Advisers need to get those goals correct at the outset and review it along the way. He concludes that while stock selection is important, in the scheme of financial planning, other things are more important.
So what is the challenge for advisers? Advisers need to systematically demonstrate a risk assessment and the capacity for risk varying by goal. Each person's capacity for risk will change. Advisers need a systematic approach to advice.
The answer lies in technology. Fundsnetwork did some research recently and found that portfolio management software is likely to become ubiquitous. What will be the key impacts for the planning process? Fisher thinks these will be in the field of time horizons, risk tolerance and goal funding. Investment value is destroyed if the wrong choices are made. This destroys client trust. Understanding a client's psychological tolerance to risk is the most important thing.
How can planning tools help? Fisher believes they can help in defining what a client wants. They can help with building the portfolio at a fund level and subsequently reviewing the portfolio. The best tools should mirror the advice process. What should advisers be looking for? A means to risk profile clients in a consistent manner. It must be dynamic because clients are dynamic. It needs an audit trail and capturing that is important. It is about building value in adviser practices. The ongoing review process is important. It is about having a systematic basis for the provision of advice and forcing clients to understand the road they are being taken down.
Evolution time for life and pensions
The life and pensions industry can rightfully be called dinosaurs - they are big, old and possibly a dying breed, said Emma Jones, investment development manager at Scottish Life. Life offices certainly need to evolve. Looking back to the days of with-profits, these were the defining product of the insurance industry and were an easy solution for investment advisers. The life offices provided asset allocation and ongoing risk management.
But for one reason or another, these have fallen out of favour. They have lost some of their unique selling points. As a result, responsibility for fund selection, asset allocation and monitoring has fallen back on the shoulders of the adviser. Jones believes life offices need to find new ways to add value.
Asset allocation is one way the life office industry can adapt to the changing needs of advisers. There are various asset allocation models. There is a certain commonality based on stochastic projections. These have additional benefits, such as compliance and can be backed up with real scientific evidence.
In terms of fund choice, products are less sophisticated. There has been a vast increase in choice and some products offer hundreds of funds. From a pensions point of view, Jones believes there is too much choice.
How do advisers choose the right funds and maintain consistency across their client bank if they have a choice of 200 UK All Companies funds? There are screening tools to do this, but Jones says they don't go far enough. It's not enough to make the right choice, it has to be ongoing. If advisers make a choice and the fund then deviates from that, it's the adviser's responsibility.
Scottish Life has spoken to a lot of advisers and while there is reasonable consensus over the solutions for high-net worth clients, there are many more questions over what can realistically be recommended for all clients, particularly group schemes.
Multi-manager allows the delegation of fund selection and ongoing monitoring, so it goes some way to resolving the issues. The key issues are the cost and the not inconsiderable premium. There is also restricted choice. Some advisers feel they are giving away too much control.
Scottish Life wants to combine the benefits of broad choice with multi-manager. Scottish Life's new range will provide enough choice to populate an asset allocation strategy. It will define the fund profile clearly - similar to a DB mandate. It will also provide ongoing monitoring and governance. Scottish Life intends to deliver 10 equity sectors, options over the risk profile, passive options and core/satellite funds. Outperformance targets will be clearly defined. OBSR will identify the funds that best fit. The investment advisory committee will be responsible for ongoing monitoring (made up of OBSR, Barry & Hibbert and an in-house team). Scottish Life believes you don't need infinite choice, but you need to offer enough to fulfil a clearly defined risk/return profile.
‘Important to have an anchor’
Report to be written by TPR
Lack of innovation for solutions
Some 2,000 consumers affected