Divide and conquer: Mark Polson on financial planning issues for 2019

Time, then, flies. Especially when 2018 was such a momentous year for platforms. Along with health, prosperity and happiness, I think my wish for everyone involved in platforms is for a much less exciting 2019. All that said, here are a few themes that I think will keep us busy this year.

You want how much? 

Yes, it’s that disclosure thing again. As you know, ex-post disclosure hoves into view in the early part of this year. Every adviser I speak to says clients don’t care about disclosure, they won’t read it, and so on. But I’ve seen a few of these documents, and I do think clients will read them. 

One paraplanner showed me the figures for a client he’d worked out, and on a £250,000 accumulation self-invested personal pension, the client paid total charges of just under £6,000, with £2,500 going to the adviser. 

For anyone opening their calculator app right now, that’s a total charge load of 2.4 per cent a year. It means 1 per cent goes to the company, 0.36 per cent to the platform and the ongoing charges figure of the investments is 1.03 per cent. 

So that’s ‘toppy’, but not quite at the level of some well-known advisory firms with high-quality headed notepaper. It’s at this point that someone usually parrots some nonsense around “cost is only an issue in the absence of value”, which ignores the fact that value is a function of cost and…oh, I give up! 

Anyway, the key point is that the client’s fund lost more than 5 per cent last year. The paraplanner summed up the disclosure statement as saying “Well Mr Client, I took £2,500 to lose you £12,500 this year.”

I’ve heard for a long time that individuals who have enjoyed the experience of financial planning don’t worry if markets are heading south, and are happy to pay fees irrespective of what’s going on in their portfolio. The fact the first round of disclosure statements will be hitting at a point where one-year returns are negative for many clients – maybe for the first time in nearly a decade – will be an excellent test of this premise.

Render unto Caesar…

My second theme for the year is the separation of portfolio management from financial planning. The sparkier reader will note that this isn’t unrelated to the first theme.

In our most recent adviser research (we surveyed 235 companies in October/November 2018), we found about 50 per cent of our respondents run their own advisory models. For those who do so, about 70 per cent of their new business is placed into these models. 

Only around a 10th of firms we talked to have discretionary permissions – this is roughly in line with the wider market: 8 per cent of directly authorised companies have discretionary permissions, but if we included appointed representatives of discretionary fund managers that number would move upwards a fair bit.

I’ve written before here about what Mifid II does to the administrative load for those who run advisory models. Most firms haven’t really felt this yet, but suffice to say that the regulation wants to make very sure you’re not doing anything you don’t have your client’s permission for. This is one of those areas where the regulation is really aimed at wealth managers doing more frisky stuff, but ‘normal’ advisers get caught.

Now admin is just admin – it’s not a reason not to keep offering the centralised proposition you’re proud of. But it puts an interesting new dynamic on the table. By my reckoning, companies adopting this route are doubling the amount of admin per client compared with running discretionary models (insourced or outsourced) or using packaged multi-asset products. 

I think it will shortly prove completely untenable for firms to run these portfolios without appointing at least one or two individuals to evidence the research, collect the client permissions and record everything properly. Larger businesses with more resources will be fine with this, probably – but smaller companies will see yet another drain on their profit and loss statement. 

I have found no evidence in all my years working with advisers that those who provide their own portfolios are able to charge a premium over firms that offer third-party investment solutions. To put that another way, the pie is the pie. You can’t just make it bigger; to do so risks visiting the dragon-infested land of 2.5 per cent and that’s a dangerous place unless you are armed with the ‘sword of outperformance’ and the ‘shield of informed consent’. 

So I think two things are going to happen this year. First, more and more companies will outsource more of their investment portfolios. That will make some DFMs happy, but the real beneficiary will probably be multi-asset providers, as long as they can get through the single-line-of-stock issue that too many advisers still see as a sticking point with clients. 

Second, more companies will split their activities into an investment management firm and a financial planning concern. Some may go so far as to have a regulated and an unregulated arm – the practice of financial planning is unregulated; it’s financial intermediation and investment management that’s regulated. That will allow proper process, specialism and focus – everything that those running advisory model portfolios need. 

For those who do choose this route, more will head down the discretionary route as long as the sums add up. Those who choose to stay advisory will find some new kit to help them. Customer relationship management providers have solutions to help with gathering client consent if all your clients are online, and some providers are building true auto-rebalancing, which removes the need for client consent – as long as you are only rebalancing back to an agreed allocation.

To summarise: render unto Caesar that which is Caesar’s. Let portfolio management be its own practice, and let financial planning be its own, too. It’s where the two meet in the same firm that life is going to become trickier.

Can I have my money back?

My third and, you’ll be relieved to know, final theme is that of clients starting to draw income from their accumulated savings. Note I’m not using the word ‘drawdown’ here, as we all know income isn’t just about pension pots. 

We’ll see two things this year. First, and most importantly, centralised retirement propositions will come of age. We’ve been thinking of these incorrectly for a long time. Many providers are rushing to create income-optimised portfolios (which might be OK) or different-for-the-sake-of-it tweaks on existing accumulation portfolios (probably not so OK). 

This is the wrong thing to do. Most companies – about 70 per cent – keep their clients in existing portfolios as they head into the income phase, and simply sell down into cash. This isn’t the answer either, but the truth is that if a client is a risk five and maintains that risk rating in retirement, then there’s not much point in messing around with the investment portfolio itself. 

What needs to change is the way money moves around inside platforms and products – even a basic three-pot strategy is hard to run on most platforms. Most products only let you hold one portfolio per tax wrapper; something which is entirely silly in this context.

If retirement income construction is to be truly holistic, then client risk modelling needs to happen across wrappers, and it’s highly likely that more than one portfolio will be required in each wrapper. Income has to flow down through the time horizons, and be captured ready to pay out to clients in a structured manner. The provider market currently leaves far too much of this to advisers to organise, but we’ll start to see that shift.

I think the leader in this space right now is Seven Investment Management, but others will start to catch up soon. Again, it’s not that portfolios are wrong; it’s just that they’re not enough.

Finally, here are a few companies to watch in 2019:

• Seccl – the first new-generation ‘adviser-as-platform’ proposition will get going in earnest.
• Embark – the business has been busy with Sipp acquisitions and white label deals and has ignored the platform a bit; this is going to change and that 0.15 per cent price point is super aggressive.
• Advicefront – already delivering excellent sign-up experiences, we should see much more from this fintech firm in 2019.
• eVestor – one of the very few robos that actually gives advice; eVestor (and its sister, Open Money) will make the most of its uSwitch partnership and give holistic advice that isn’t all about pensions and investments.

And that’s it. We’ll see how we do. I don’t know about you, but I’m really looking forward to it.

Mark Polson is principal at the Lang Cat