Faced with time-consuming choices for investing a client's capital, advisers are looking to outsource the decision-making process, but are fund of funds worth the risk of rendering the adviser redundant?
The world of financial advice continues to become more cluttered with choices and options, and for the more astute adviser the world has moved ahead in leaps and bounds, from the days of with-profits (or rather without-profits) through to using vanilla flavoured poorly-performing tracker funds or managed funds.
The modern investment climate now demands advisers create investment strategies for clients which deliver real returns. This has placed great pressure on advisers who have been forced to raise their game and upskill to meet client demand.
An obvious question for any prospective client seeking to engage the services of an adviser is how their money will be invested. The answer given will be crucial to establishing a long and sustainable relationship.
Responding to that by saying advisers create a portfolio bespoke to the client would be a very positive and encouraging answer. However, more often then not, the client will then ask exactly how this is done.
Therein lies the problem - just how does an adviser select the right funds at the right time at the right price? For many advisers the answer would be to outsource the decision-making process and use fund of funds or multi-manager offerings.
All well and good, but spin back to the client's perspective and there may well be another question that springs to their lips - what do they need an adviser for if they buy into a fund of funds?
This is a fair question, bearing in mind the reason investors seek investment advice from advisers is because they do not know what to do and how to invest wisely. If they did know, they would do it themselves direct or via the internet.
Recent findings from CWC Research identified a number of reasons advisers prefer to use a multi-manager provider for their clients' investments.
Of the advisers surveyed, 20% cited business risk as the primary factor, claiming a fund of funds helps to clearly control risks to a business. This compares with 17.5% who claimed it is the expertise attracting them to fund of funds or multi-manager products. This is crucial in the modern investment arena where many advisers find it demanding and time-consuming to do the research, hence the decision of a significant proportion of those polled to pass on the investment decisions.
Where the adviser or intermediary firm does not have access to a robust and demonstrable research and fund selection process, the outsourcing option also offers the means to provide investment advice.
Asset allocation is also an important factor with 15% of advisers polled stating this is an overriding factor when selecting a fund of funds or multi-manager product. This is no great surprise because asset allocation is key to successful portfolio construction.
Also coming in at 15% was outsourcing work that can be done just as well, if not better, by a third party. This reasoning could lead clients to question whether the adviser adds value in the process. Meanwhile, advisers placed review/rebalance at 7.5%. This is surprising, considering advisers believe this to be an important facet of the multi-manager/ fund of funds offering, when in reality it is an essential facet of any adviser/investment client relationship that could add major value to a business.
Compliance was also a contributing factor coming in at 5%. It is reassuring that only a small number of advisers use multi-manager products to meet this business requirement.
A surprisingly small percentage of advisers (5%) considered size of potential investment as a reason to outsource. This leaves the question as to whether there is any correlation between the number of advisers who build recurring fees into their business relationship as opposed to those advisers with no intention of seeing the client again.
A recent poll of 500 intermediaries, conducted by Credit Suisse, cited regulation as the overwhelming reason advisers use multi-manager products. The rationale given is, by outsourcing, the adviser is able to hand on the responsibility for fund choice to some other person or group.
For an adviser working as a generalist, the outsourcing route is an easy method of dealing with investment clients. In other situations the adviser may just not feel confident providing the advice on fund selection and asset allocation.
Another key fact emerging from the Credit Suisse research was some 34% of all investment recommendations from those polled goes though a multi-manager investment proposition.
Commenting on the research, Robert Burdett, joint head of multi-manager services at Credit Suisse, says: "The spread of investments is the key reason given by advisers for picking multi-manager funds, which shows their clients are demanding the highest levels of diversification, not just by country, sector or style but by fund management groups."
According to IMA statistics, fund of funds products accounted for 20% of all fund sales in the first quarter of 2006, while growth among multi-manager funds has been quite startling with a rise of 68% over the last year alone. Fund of funds now manage assets of £26bn, up from £23bn at the end of 2005.
In tandem with the shift towards multi-manager funds, a reduction in tracker funds has been noted, as investors shy away from passive investments.
One may be easily seduced into thinking all is rosy when outsourcing investment advice but there are several key issues needing consideration.
In the drive to raise the profile of advisers as professionals offering and delivering a valuable advice service to clients, what of the expectations of clients in terms of what are they getting for their money?
Irrespective of the business model being employed by the adviser - be it fees and/or commission - the point to focus on is how the client feels the adviser is serving their individual needs and requirements, particularly when it comes to investment advice.
keys to good relations
Sound business relationships between intermediary and clients are built on four key factors:
1. Does the client trust the adviser with his/her money?
2. Does the client understand what is being proposed?
3. Does the client feel the adviser has his/her interests at heart?
4. Does the client believe the adviser is sufficiently skilled?
By applying these measures to a business transaction between a client, an adviser and a third party some uncertainties may bubble up. These could include:
1. Why is the adviser not doing this?
2. What do I know about this other company who will be handling my money?
3. Am I paying more for the service with the multi-manager solution?
An investment adviser who has not considered these issues may need to step back a couple of paces and think through the potential consequences of using the outsourced route for investment selection and asset allocation.
Advisers have to create investment strategies which deliver real returns
Growing number of advisers beginning to outsource decision making
In tandem with the shift towards multi-manager funds, a reduction in tracker funds has been noted, as investors shy away from passive investments
Despite improved risk appetite
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