Both multi-manager and discretionary manager approaches have much to offer in retirement planning strategies. John Kelly looks at the pros and cons
The description of retirement as a new beginning is nowhere more true than in investment. A well-constructed strategy can lay the foundation for financial security, and from that fulfilment in later years. When considering the right strategy to follow there is a need to look for individual approaches to meet individual needs But some things are likely to be true for most of us; a gradual move from capital accumulation to consumption, a tolerance of risk that reduces as opportunities to replace lost capital diminish, and a need to maintain the purchasing power of income and capital over time.
The prospect of retirement leads many people to seek sound financial advice but from where? The traditional choice has often been a discretionary portfolio manager. But more recently a wide variety of multi-manager offerings have become available which offer a real alternative for some. What are the main features of each - and does one offer clear advantages over the other?
A good discretionary manager will start with a crucial advantage in planning the right strategy - knowledge of the client. Sometimes pension solutions need to be tailored to fit specific requirements and these can be best addressed by someone with knowledge of both investment markets and the true needs of the customer.
Too often we forget that success in life does not necessarily automatically bestow an understanding of, or even interest in, investment markets. Needs may not be well articulated, the unforgiving relationship of risk and potential return may not be well understood. Excess caution and a lack of familiarity with the traps and opportunities that litter tax legislation all stand in the way of a successful plan. Improving the odds with a well-structured proposal makes sense because for most it will move the probable outcome up the slope from risk of failure to chance of success.
To match strategy to need, the discretionary manager has access to a wide range of investment products - products because for all but the most wealthy, it will be sensible to use funds rather than directly held assets. This is in order to achieve an appropriate spread of individual stock and geographic exposures - essential if risk is to be diversified. Costs though can be an issue. An unfortunate fact of investment life is that while not all ideas will generate good returns, they will generate costs. Never fashionable but always important, cost control is often the difference between good and mediocre performance. This does not mean that we should begrudge paying for a good idea but it does mean that transaction costs for example from buying funds with an initial charge or by undertaking even a modest level of fund switching, can prove very expensive and damaging if market returns are modest. Many discretionary services will rebate at least some of these fees which will mitigate some expense but nothing will eliminate the potential exposure to CGT which active management can generate.
Specific customer knowledge, a wide range of investment choices and some influence on the level and timing of costs are powerful attractions for the discretionary manager solution and help to explain their popularity.
The role of multi-manager
However, there is no doubt that multi-managers have been growing rapidly in this area, both by bringing in new customers and by winning market share - sometimes from discretionary manager competition.
What differentiates the multi -manager approach? A multi-manager puts together a portfolio of fund managers, each expert in a particular field. Established investment theory is that, while no one investment manager can be the best in all markets at all times, there are individuals with real and persistent skill who can, in the uncertain world that is investments, improve the investor's chances of success.
By combining top quality managers in an asset allocation designed to produce a particular level of investment return with a predetermined level of risk, it is possible to solve a number of investment problems in one go. Of course the investment answers are generic rather than specific but, in a society that prefers to queue for a cash machine outside a bank rather than venture inside, many will find the ability to steer clear of involvement with an industry which is poorly understood, this is attractive.
If this brings into the advice loop retirees who otherwise would have stayed remote from it, then it has to be a very good thing. At one end of the spectrum, well informed customers, competent to make choices for themselves, will often prefer the clarity and ease of use that a multi-manager provides. For others, those with complex needs or whose circumstances are likely to change significantly, the easy answer could prove to be less satisfactory and more costly in the longer term.
In terms of running costs multi-managers will have the advantage, but it is important to stress that costs and benefits have to be looked at over the length of the relationship and not just at inception. Certainly where the strategy involves buying funds, the muscle of a multi-manager will be able to avoid initial charges and push lower annual fees. Another advantage of the multi-managed route is that changes within the overall fund - replacing managers or moving geographic weightings, are not taxable events. This means that the portfolio can be rebalanced to best reflect the investment environment without risk of exposure to CGT.
We can see then that these are two different approaches to solving the problem of providing investment advice. Is one demonstrably better than the other? The answer is no. Rather together they offer a broad choice of style, approach and cost which has improved and enriched the choices available. The recommendation has to be to consider each, look at the service they provide, the costs involved and the returns achieved.
Has run Cautious Managed fund since 2011
What’s right – not what sells
Richards fires back at committee report
Available on Investcentre platform
Invested from 2006-2011