We have an emerging dilemma in terms of investment management and how an IFA can add value, or maybe more pertinently, justify their 0.5% trail commission.
Before the demise of with-profits, advisers were polarised into those that did, such as discretionary portfolios, broker managed funds, UTs and Oeics, share-dealing, and those that didn’t, in the murky world of with-profits, where advisers effectively outsourced their investment management and slept comfortably in the now flawed theory you couldn’t lose your shirt on it. Well, hindsight is a wonderful thing, but how wrong could they be!
In both scenarios, everyone made money, from the manufacturers (investment house or insurance company) to the distributor (adviser) who were paid royally whether active or passive investment managers.
Manufacturers have sought the replacement vehicle for with-profits for some time and the answer is often seen as fund of funds (FoFs) or manager of managers (MoMs). In a recent survey from New Star, the investment company asked 90 advisers to give their model portfolios, using New Star retail funds, for three different clients, and many featured these portfolios. One IFA described them as the ‘lazy man’s option’, with the investment choices, asset allocation, and rebalancing being outsourced to a trusted third party.
I recall the first ‘manager of manager’ presentation that I attended and whilst the strategic asset allocation and disciplined rebalancing sounded great in principle, the audience was staggered to see the UK equity portfolio mirroring the FTSE100, albeit slightly below. It was ‘a quasi tracker’ one attendee piped up. Whilst trackers are brainless in terms of stock selection, they do come cheap, with 0.5% annual management charges (AMC) or less being common.
MoM and FoF come at a price, and an amc north of at least 1.5% is the norm, in order to pay for the administration, third party fund manager costs and the 0.5% adviser trail. Whilst cynics argue that they are basically a method for going long in equities, they do have benefits of de-risking investments through diversification and regular rebalancing.
The real challenge is to build a compelling client proposition where the value of the IFA comes from assisting clients in reaching their life goals, and not being seen as some kind of investment guru.
Whilst maybe the soft option for many IFAs who don’t have the time, inclination or skill-set to manage client money, there is a cautionary note about justification of the trail commission, which the regulator looked at last year.
There is also an issue about replication by direct marketing companies, as these funds and model portfolios can be easily marketed and transacted, and almost a ‘buy and forget’ transaction that doesn’t need too much maintenance.
Colin Sloss is head of business development at the Exchange.
The views expressed are those of the author and not those of the company he represents.IFAonline
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