A financial adviser's passive strategy has outperformed many of the big active managers over the past five years, as he suggested some professional investors are guilty of too much chopping and changing.
Director at Provisio Financial Planners, Andrew Whiteley, who has been an adviser for 25 years, said he had been “left cold” with the end result for clients when he had used discretionary fund services in the past.
In 2008 he decided to revamp his company’s investment proposition by buying asset classes through index-tracking funds.
He said this proposition was “immediately dependable” because he could back-test the indices, adding: “We knew what sort of returns we could expect and the risk each portfolio could have; we also knew there would be no surprises from active managers taking tactical bets.”
We didn’t think DFMs add any value; it just adds costs.Andrew WhiteleyFigures from FE Analytics indicate the five baskets of passives - from defensive to aggressive - that have been put together by the Provisio boss, based on his research, have returned between 42 and 48 per cent over five years.
This is almost twice as much as the averages across the FE UK Risk Targeted Multi Asset portfolios risk bands one, two and three.
Mr Whiteley said the low cost of his proposition has pulled down the overall fee for his clients.
Provisio made this proposition available to other advisers in 2010 by launching a separate business called Assetfirst, which undertakes all the research on the multi-asset allocations.
IFAs pay a subscription fee for the research, which starts at £500 a month per firm, and Assetfirst provides regular tactical positions and stock selections updates, meaning advisers are effectively managing their own client portfolios but with assistance.
Mr Whiteley also said simply providing the research means clients still see the adviser as the main point of contact.
"The IFA's involvement in portfolio construction means they can explain to their clients why a portfolio has performed the way it has, rather than relying on a third party to do, so if things go wrong then they know what has gone wrong."
Yet he said he wasn’t interested in being a DFM, adding: “We didn’t think DFMs add any value; they just add costs.”
While he makes occasional tactical tilts to the portfolios, he said the returns made over the five-year-period have been achieved by “sticking to his knitting”, reducing costs, and not making changes for changes sake.
“Anyone who says they need to be chopping and changing and moving out of asset classes every five minutes is just trying to justify their existence.”
He also questioned whether DFMs are doing enough to search for funds that can produce the best returns, adding: “I think that perpetuates the problem because so many people are willing to stick client money in funds that are run by big names without expecting much from them.”
The Provisio boss said he thought there are very few IFAs who are cost-effectively running money, and criticised those firms which force clients to pay for the investment proposition.
“I think the IFA firm should pay for their own proposition and the client should benefit from it, but in 99 per cent of the cases I don’t think that is happening.”
Yet Mr Whiteley said this was not about engaging in the active-passive debate, and instead was simply about being in control of clients’ investments.
“But as time has gone by, there is very little research that would justify appointing an active manager in many sectors,” he said.
He described the criticism of the sector in the FCA’s asset management report as “fair” and said the charges and performance of the active industry is “not good for clients”.
“Is it a coincidence that the annual management charges across the board are around 0.75 per cent since the Retail Distribution Review? None of the groups really deviate from that.
“It seems that no one wants to step out of line and be competitive, whereas in the passive space that is what happens.”
The newly-launched DFM Alliance, which is made up of five firms including Brewin Dolphin, Brooks Macdonald, Investec Wealth & Investment, Quilter Cheviot and Rathbones, was set up to address concerns from advisers.
A spokesman from the alliance pointed out that these worries can range from the cost of services to mistrust about what using a DFM might mean for client relationships.
Commenting on the criticism of the industry, the spokesman said: "Our aim is to demonstrate that, as the burdens on advisers increase, working with DFMs can actually improve efficiency and outcomes for the end-client.
"There is a time for passive selection, while selecting emerging themes and asset allocation may be essential for longer-term growth.".
katherine.denham@ft.com
