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By David Cartwright | Published Jul 30, 2012

Defaqto: Avoiding standardisation after RDR

Offering investment advice after the RDR is not just about building core services for clients such as a standardised investment proposition. It is as much about having satellite alternatives to any core proposition and to ensure that round peg requirements of clients are not shoehorned into square holes.

For any approach to be sufficiently robust, there has to be a core and satellite structure employed, both to support a full range of clients and to enrich dialogue with clients whose needs seem to be met by one or more of your core services.

Advisers must recognise that one solution may not fit everyone’s requirements and that they must primarily select investments for their clients based on whether they are suitable for them as individuals.

Back to basics

Before they construct their specific ‘core and satellite’ offerings, firms must reflect on the overall investment services they will provide. They should create some form of document detailing their approach to investment, however simple. This document should summarise attitudes to such issues as timing an investment in a particular market, picking stocks, whether markets are efficient, how clients’ assets should be allocated and potentially the quest to select investments that will outperform financial indices, where relevant.

For any post-RDR investment advice approach to be sufficiently robust, there has to be a core and satellite structure employed

All of this is absolutely fundamental to investment and provides a reasoning that would underlie any sound approach to the field. Within such a document you would also lay out the key pieces of theory and supporting empirical evidence that would militate in favour of your approach. Any economic assumptions should also be clearly documented, and the adoption of any assumptions should be supported by clear reasoning.

A good example of this would be the so-called equity market risk premium, which many use to derive assumptions about equity based investments. The basic principle is that riskier investments such as equities should offer higher potential returns, to offset the higher risk being taken with those assets and asset classes. In light of these considerations, advisers need to be able to blend assets like equities to optimise their clients’ portfolios.

Core versus satellite

After addressing the basics, it is time for advisers to look at a sufficiently broad investment offering that avoids what the regulator now refers to as shoehorning all clients into a one stop shop solution for their needs. Even a broad, subtle solution may carry costs that are inappropriate for a client with simple requirements.

While there is certainly no one answer to the ‘core versus satellite’ debate, it is becoming more widely accepted by the more experienced practitioners that an investment offering should not be too constrained and must be flexible enough to fit a full range of clients. The jungle of options includes: bespoke discretionary fund management; model portfolios; multi-manager funds investing in traditional assets; multi-manager funds investing in alternative assets; passively managed funds; actively managed funds; funds aiming to deliver absolute returns; structured products and solutions; ‘lifestyle’ funds; funds with a risk rating; open-ended funds; investment trusts; exchange traded funds; and specialist vehicles. All require proper due diligence.

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