One of the persistent features of the advice market today is the trend for advisers to outsource their investment management processes to portfolio management experts.
Every piece of research we see on the topic of outsourcing the investment process suggests that the proportion being outsourced is going to continue to increase in future.
One piece of research I read gave the two most important reasons of considering outsourcing being to get “access to specialist portfolio management skills” and access to a “risk-targeted approach ensuring suitability”, with other reasons cited being around the subject of the adviser’s business efficiency.
But there is another factor at play that is very interesting and that is the fact that the take-up of the use of investment trusts on platforms is so low (under 1 per cent on the Novia platform) in spite of the fact that independent advice requires advice on retail investment products under the RDR.
Given that there is a substantial body of evidence showing that investment trusts outperform unit trusts and Oeics managed by the same fund manager, the lack of take-up is surprising.
My conclusion, therefore, is that the use of investment trusts by discretionary fund managers (DFMs) in model portfolios on platforms could grow rapidly and, indeed, we are beginning to see that happen.
The reasons for the slow uptake of investment trusts by advisers is, in my opinion, due to a number of things, but primarily due to a historic lack of familiarity and a perceived (and real) additional complexity and risk – but these factors do not remove the responsibility to advise on investment trusts.
For example, investment trusts that involve managing fixed amounts of money and the opportunities and drawbacks provided by supply and demand, reflected in price discounts and premiums, need to be considered and optimised.
Also, it is undoubtedly true that one of the factors affecting performance in investment trusts is leverage which, while giving the opportunity for increased performance, also gives rise to additional risk which needs to be considered and explained to clients.
So the process of choosing, when compared with unit trusts and Oeics, becomes undoubtedly more complex.
This additional complexity gives rise to additional work and expertise, which will in turn of course, give rise to significant extra costs if the adviser firm were to do the job itself, so it isn’t surprising that an increasing number of advisers are considering outsourcing.
On the other side and making the decision easier, we have seen the cost of outsourcing drop dramatically in the past few years.
This has come about since DFMs have started to work with platforms and both parties turn their focus to their core expertise – fund management by the DFMs and administration services by the platforms.
Bill Vasilieff is chief executive at Novia