As advisers prepare for a Brave New World from January 2013, it is perhaps not just the adviser community undergoing something of a ‘baptism of fire’ as we prepare for the aftermath of the RDR.
The RDR itself will require an increase in the breadth of knowledge of financial products that advisers need to understand; much more so than previously. With strong long-term performance and unrivalled income records, investment companies have many benefits which may have previously been overlooked.
We have had many legitimate questions from advisers about the pricing structure of investment companies, with gearing and charges also high on the agenda. Many advisers have wondered what constitutes a ‘safe’ level of borrowing in an investment company. This is, of course, relatively subjective.
Advisers are also concerned with the difference between ‘net’ gearing versus ‘gross’ gearing (net takes into account issues such as cash holdings which would ultimately offset the gearing, whereas gross gearing doesn’t). And with charges increasingly in the spotlight, it’s also encouraging to see advisers asking more questions about investment companies’ total expense ratios, performance fees and dealing costs.
But when it comes to the relationship between the adviser and client, the adviser needs to be prepared for every question they might get.
Questions your clients may ask at their next review:
1. How often will my portfolio be reviewed? Will it be reviewed following the RDR?
2. Can I achieve what I need with my money? (Rather than simply asking for maximum returns from minimum risk, clients will need to be more specific. For example, they might want to accumulate a pot to buy a new house, or earn a specific amount of income in retirement. Setting client-specific objectives, not going along with what you think you can deliver, is key.)
3. How will the performance of my portfolio be assessed against my objectives?
4. How does my portfolio spread risk to achieve my objectives? They need to understand different asset classes, such as cash, equities and fixed interest securities and how they work in a portfolio.
5. What benchmarks do you use? If an adviser uses benchmarks to show how clients’ money is performing, ensure this is fully understood, and the likelihood that clients will reach their investment objectives. Some advisers use Association of Private Client Investment Managers and Stockbrokers (Apcims) indices or alternatives to show how well a portfolio has done.
6. How are the individual investments selected? Do you research the whole market, and if not, why not? How could not doing this impact the likelihood of achieving my objectives?
7. What types of investments will be considered? (For example, will you use investment companies, open ended funds, exchange traded funds etc.?)
Jacqueline Lockie is training manager at the Association of Investment Companies (AIC)
