Having just spent a couple of days networking with investment-oriented IFA businesses, it is timely for me to be able to air some thoughts on fund picking and risk analysis when working to create portfolios for retail clients.
There was much debate about the differing approaches taken by IFAs when choosing funds for their clients to invest in and I was surprised by the numbers of firms and individual advisers who appear to have swallowed the multi-manager hook wholesale, now passing across all their investment capital to a multi-manager proposition. Consider some of the reasons that advisers gave for doing this and they fall into several distinct camps: first off and perhaps the most numerous are those firms who simply believe that they do not have the expertise and skill or indeed time and resources to pick funds for their clients.
Another cohort of IFAs seem to believe that by using a multi-manager investment solution it in some way reduces their firm’s risk exposure - I venture to suggest that they may just have read too much marketing hype from investment houses and they really need to take a step back and consider the fuller implications of what they are doing. The buck does not stop with the multi- manager provider - the IFA gives the advice and takes the responsibility full stop.
Surprisingly I also found several examples of IFA firms who felt that they were actually not interested in fund selection and investment research and were happy to let somebody else do the work and put the portfolios together and run the money. The conversation around this and sustainable fees post-RDR for independent firms may well be quite interesting – clearly these firms believe that their outsourcing business model adds value in other areas for the client?
Another viewpoint widely held was that in reality the majority of investment IFA firms do not have the capability to choose funds from the total investment universe and that the use of model portfolio makes crushing business sense in the post-RDR business environment. How this will fit with the regulator’s requirements that independents will have to have awareness of and choose from all asset classes and investment products remains to be seen.
It was clear to me that opinion is much divided on the pros and cons of using multi-manager or indeed fund of funds as the basis of the investment proposition for an IFA practice.
The decision making process around this has to be based upon a sound and robust investment research process, one that is clearly demonstrable and understood and practised throughout the firm when advising clients. This is not just the domain when considering multi-manager propositions, but should be the bedrock of any IFA practice working with and advising clients.
With the ever-increasing regulatory focus on ‘suitability of advice’ there is and will be rising pressure on IFA businesses from three distinct areas:
• To adapt and develop their business model across the board to survive and thrive beyond 2013.
