The selection process poses thorny considerations once the decision to outsource is made, so it is worth looking at each of these questions.
First, however, we need to take a step back to put the health and prosperity of adviser businesses post-RDR in context and to understand the drivers for multi-manager appeal.
Research conducted among more than 250 UK investment advisers to measure sentiment shows interesting dispersions. The absolute level of the index at 5.1 (on a scale of 1 to 10) reflects the mixed adviser landscape.
Despite a shaky start to 2013, flows are reviving as is client-facing advisory activity. With advisers in Q1 reporting a focus on improving the efficiency of their business, segmenting clients, documenting business plans and completing qualifications, it is not surprising that client activity was more subdued.
However, in Q2 advisers reported that their take-up of new clients had increased and their outlook was considerably rosier, with half expecting to see a profit rise over the next year. While this is a positive sign, advisers keeping up with RDR will have to balance managing client investment selection with maximising business profitability. In fact, the rising use of multi-manager funds is a key enabler of client segmentation and increased business efficiency.
Those reporting the most success displayed a number of common characteristics, including:
- Being proactive business managers implementing formalised business planning activities, exploring client segmentation and generally looking after profitability of operations.
- Analysing the lifetime value of individual clients.
- Heavily using paraplanners.
- Streamlining their advice proposition by embracing centralised investment propositions.
- Undertaking or working towards further qualification.
Considering these factors, successful advisers face a challenging balancing act: monitoring client investment selection while maintaining and boosting the value of their businesses.
One appeal of outsourcing investment selection is freeing the individual adviser from having to sift through the 3000-odd funds available in the UK market alone, allowing them to focus on broad financial planning and business management.
Growth of outsourced investment solutions in the marketplace attests to its rapid adoption. Assets under management in multi-manager funds have seen a compound annual growth rate of more than 24 per cent in the last 10 years, according to Lipper Fundfile. Flows into these offerings were up 71 per cent in the Q2 over the same time period last year.
As part of choosing suitable products to cater for their outsourcing needs, advisers need to pay close attention to the providers they team up with and the outcomes they can produce. With the increasing focus on due diligence of platforms and providers, advisers will need to take a number of critical factors into account, including the stability and strength of the provider; management and staff continuity, expertise and depth of resource; the investment process and whether it works; and investment outcomes in terms of risk and reward.
The simplest way of drawing up a list of options that suit different investor profiles is to use the available risk-rated fund ranges, graded by external risk consultancy firms. Yet with the increasing prominence and popularity of risk-rated multi-manager funds has come heightened scrutiny on costs, performance and suitability.
So how can advisers make use of risk-rated multi-manager funds that provide solid, comprehensive investment solutions to their clients while ensuring they look after suitability and match the client with appropriate pricing? They have to look under the hood.
When asset risk consultancies apportion risk grades, it is based not just on the expected volatility but on a balance of historical volatility and asset allocation. As a result, you start to see multi-managers that carry the same risk ratings having remarkably similar asset allocations and that, by and large, they are all selecting funds from the same universe. Pricing is also similar, with an average ongoing charge of 1.93 per cent in the market and little spread either side of that figure.
Not surprisingly, this translates into incredibly similar performance. Looking at ‘balanced’ funds, among the multi-manager funds risk-rated 5 by Distribution Technology over the last three years, there was less than a 6 per cent spread in performance, compared with a difference of 31.2 per cent between the best- and worst-performing funds in the wider IMA Mixed Investment 20 per cent to 60 per cent shares sector.
This sameness trend has even caught the eye of regulators. The FCA is voicing concerns about advisers shoehorning clients into a particular strategy without truly understanding their clients’ needs.
To avoid offering a ‘me too’ solution, look at the critical variables: asset allocation and fund selection. To what extent can the fund manager create excess return or alpha through tactical and strategic asset allocation and through stockpicking?
Strong asset allocation is key. Actively managed portfolios that can accommodate an element of short-term, tactical allocation shifts can bridge the gap between the manager’s long-term assumptions and current market conditions, while bottom-up fund selection can help identify opportunities.
Behind a comprehensive fund selection process there must be a strong research team. It is important to determine:
- The size of the research team.
- The sort of analysis used.
- Whether the team has industry recognition and solid experience.
- Whether the team has broad coverage and good access to the managers they select.
- How often the team meets the managers and whether they can command space in limited access or bespoke fund offerings.
While the packaging of these choices might often look the same, the palette from which the fund managers paint can make all the difference. Whether a fund can deliver its objective over the long term and survive varying market conditions can only be determined accurately by looking at the process and team behind it.
Solution
Put another way, the solution is to fish in a bigger pool. With greater research resources and global reach, fund managers can take the strain from advisers, and produce risk-rated portfolios that tick the boxes in terms of risk-rating, asset allocation and price, but which also leverage the managers’ scale and expertise to identify the best investment opportunities.
More choice and rigour in multi-manager offerings should result in better end outcomes for consumers – they get the simplicity of a single fund from a tax reporting perspective, coupled with, ideally, sophisticated and effective asset allocation and fund selection processes and capabilities. The move to clean share class pricing levels should also lead to a decrease in the price at the fund level.
There is a great deal of positive momentum behind the multi-manager landscape.
Jane Nicholls is managing director and head of adviser Solutions of JP Morgan Asset Management
Key points
- The multi-manager offering is a compelling choice as an outsourced investment solution.
- Advisers need to pay close attention to the providers they team up with and the outcomes they can produce.
- Actively managed portfolios that add an element of short-term, tactical allocation shifts can bridge the gap between the manager’s long-term assumptions and market conditions.