Outsourcing a centralised investment proposition (CIP) may not be the most effective route for advisers, according to a study conducted by CWC Research and the lang cat.
Many advisers are disregarding the top-down approach in portfolio selection, recommending products based on their familiarity with them as opposed to selecting them based primarily on client needs. The interests and business model of the firm often appear to trump suitability considerations in CIP creation.
The first part of the study, conducted by CWC Research, determined that the trend toward greater use of outsourcing for asset allocation and fund manager selection was being driven by a combination of increased focus on risk and due diligence. The process was partially influenced by client perspective, and the use of attitude-to-risk tools was common.
Clive Waller, senior partner at CWC Research, said, “The regulator’s position is quite clear. When selecting provider for CIPs, there are two overriding consideration: due diligence in the selection process, and suitability of the products for the client.”
Some advisers appeared to be falling short on FCA requirements, such as inability to cite the main charges on preferred funds, despite the focus on data providers and tools. Advisers would too often recommend certain funds simply because the firm had a history of using them, not because they were best suited to client needs.
Clients with smaller portfolios were most often recommended a multi-manager (MM) or multi-asset (MA) fund, while advisers gravitated towards discretionary fund managers (DFMs) high net-worth clients, despite the lack of transparent charges.
The second part of the study, conducted by the lang cat,concluded that there is a definite shortage of consistent and comparable data available to advisers. There is also no purely cost-based argument or performance reasons that either DFMs or MM/MA portfolios to be more suitable than the other, and that the market appears to be pricing itself.
Mark Polson, principal at the lang cat, said, “At present, there is no way for an intermediary to achieve an effective whole of market, time-efficient, quantitative analysis on model portfolios.”
Risk-based portfolios do not appear to be delivering their promises of higher returns when set against key indices and volatility does not perform as expected across risk levels. Therefore, there is no particular reason that would make outsourced CIP more suitable based on client risk appetite.
The report concluded that outsourcing a CIP may not always be the ideal option and that advisers need not project their views onto clients. There remains the concern that if left unchecked, these problems may continue to fester and, in turn, hurt more customers.
