Senior sales staff at major fund organisations have said that the lead time from first speaking to an adviser about a product to securing a sale had become “extended”, because intermediaries were becoming more professional in their scrutiny of funds.
The move is, in part, being driven by the trend towards model portfolios, whereby advisers are more enthusiastic about holding funds for the long term and ensuring products meet their objectives, rather than pursuing purely short-term gains.
Ben Waterhouse, head of UK retail sales at Fidelity, said that advisers’ due diligence process was “extending” and becoming “deeper and multi-dimensional”.
“What was traditionally a research process that sat in the institutional marketplace is now being applied in the retail space, which is becoming more sophisticated,” he said.
Mr Waterhouse said asset managers had to make sure their sales teams were structured in a way that would help advisers through the due diligence process.
“I think this is the case across the board,” he said. “Talking to advisers and discretionary fund managers, they have a clearly defined investment process that they will follow. We have to ensure that we are structured in a way that fits in with that process.”
He added that many more advisers were building centralised investment propositions, which tends to mean they prefer to hold funds for a longer period, as any changes have a bigger impact.
Robin Stoakley, managing director of UK intermediary at Schroders, said the process advisers used to select funds and construct portfolios was “definitely more rigorous than it was in years gone by”.
“This is down to market conditions, because it is tough to run money, and the FCA is increasingly focusing on the quality of advice given to consumers,” he said.
Mr Stoakley added that he agreed with Mr Waterhouse that this growing trend among advisers is “typically resulting in a longer lead time”, suggesting that centralised investment propositions were part of the reason.
David Aird, managing director of UK distribution at Investec Asset Management, said that it was “absolutely” the case lead times were extending.
“The whole fund buying, manager selection and portfolio construction processes are becoming more institutional in many ways,” he said.
“We are absolutely seeing lead times lengthening and the whole process being professionalised to a higher level.
“I would go as far as to say we are now seeing in the retail channel a higher threshold in terms of due diligence and manager selection than in some parts of the institutional channels we operate in around the world.”
Mr Aird added that Mercer was now “actively promoting” its Global Investment Manager Database to wealth managers, which was previously reserved for institutions.
He added that advisers were, as a result of their more institutional methods, becoming less distracted by so-called star managers and more interested in whether a fund was meeting its performance objective.
“The due diligence in the retail space is looking at consistency, process, the team behind the fund and the resources the manager has,” he said.
External fund validation is driving more adviser businesses
Centralised investment propositions enable mass-market financial intermediaries to outsource their clients’ investment portfolios to specialist investment management companies, who generally use structures such as multi-asset funds and model portfolios.
Nationwide financial advice companies and networks have already established their own central investment panels to carry out fund research too, but this is now extending to smaller adviser firms in a big way.
The trend means advisers have a strict and detailed process for fund selection, because the choices they make have to fit into their core portfolio.
As a result of stringent regulations under the retail distribution review about quality of advice, many intermediaries are increasingly seeking third-party confirmation that their fund picks are right.
Schroders’ Robin Stoakley said the process used by advisers was “a lot more dependent on external validation than it ever was”, citing that a backing from groups, such as Morningstar OBSR, Square Mile Investment Consulting and Research or Rayner Spencer Mills, had become even more important.
Fidelity’s Ben Waterhouse added that fund flow was now “more concentrated” and that fewer funds were “taking a greater share of new business”. This is likely to be partly down to funds getting third-party backing and, therefore, receiving more assets.
Just as institutional investors have supplemented their own research with information from databases produced by companies like Mercer, it seems IFAs are also increasingly using external research to help justify their fund picks.
This increasingly means that fund groups have to jump through more hoops for advisers than perhaps they previously had to and this should lead to more robust fund selection.
