It seems that the easiest solution for a platform client portfolio is a mixed-asset fund. These are effectively the rebirth of the old managed funds and balanced funds. The requirement to provide a simple solution that reflects client risk tolerance has led to the recent development of many new mixed asset fund offerings.
The availability of additional asset classes and asset allocation tools have encouraged this trend. These mixed asset funds are especially suitable for smaller portfolios and for the early accumulation of assets through regular savings.
For larger sums, advisers often prefer to develop a portfolio of both passive and active funds and perhaps exchange traded funds (ETFs). Many advisers outsource this service to discretionary fund managers (DFMs).
Less than five years ago, advisers who wished to introduce a client to a DFM also had to risk being disintermediated. The DFM became responsible for client money and custody as well as investment management. This has the risk of creating a relationship between client and DFM whereby it could be difficult for the adviser to recommend a change of DFM.
Platforms created the opportunity to separate client dealing and custody from the investment management process. This ensures that the client relationship remains firmly with the adviser who established the original relationship.
If the DFM fails to deliver the expected performance, then the adoption of a new DFM is a low-cost, low-risk and relatively hassle-free process for both client and adviser.
Many firms have, of course, adopted their own advisory investment process. Some enhance their selection with analysis, research and propositions from third parties. A significant and growing number are outsourcing to DFMs.
In all cases, the responsibility for ensuring the investment is suitable for the client remains, of course, with the adviser. An additional requirement of all of these solutions is a robust governance process.
Demonstrable process and oversight, including active and duly recorded discussion and decisions by appropriately qualified individuals is the new standard. The task remains to decide which is the most appropriate route for the firm.
The benefit of outsourcing investment decisions and expertise must be compared with the cost. With the emergence of competition, however, the cost has reduced significantly over time.
These investment models require sophisticated platform functionality. The ability to include ETFs in the portfolio and rebalance at will is now an expectation of sophisticated advisers.
New developments being considered include the ability to attach one portfolio to more than one model and to move from one model to another to provide ‘lifestyling’.
This will allow advisers to manage client portfolios such that client tolerance for risk is matched to their needs for income. It will be possible to invest in riskier assets for longer with comfort that shorter term requirements for income are met by short-dated bond and gilt funds.
Effective platforms will have to match the client’s rapidly developing expectations, which are the result of an increasingly sophisticated financial planning process delivered by advisers.
Hugo Thorman is chief executive of Ascentric
