Filtering down the funds universe

Filtering down the funds universe

It takes little more than a glance at Money Management’s contents section to confirm one truism of financial advice: as a business area, it’s rarely short on variety.

Intermediaries can deal with any number of different subjects in a given week, from pension transfers to regulatory requirements and fee structures. But there’s one thing that ties most together: these are complex issues that they must set out as clearly as possible to clients.

Simplification has long been a standard element of adviser practice, whether it’s in relation to consolidating a client’s assets or presenting data in a uniform way. 

Now the push for less complexity is having a direct impact on client investments themselves, courtesy of advisers cutting back on the number of funds they use within portfolios. Shifting priorities and the impact of new regulatory requirements mean this is a trend that may accelerate further. But it is not without its challenges.

The how and why

Advisers have been simplifying their portfolios with a number of factors in mind, including the desire to increase transparency for company and client, and an accumulation of pressures when it comes to both cost and the burden of compliance.

Data on the typical adviser portfolio is hard to come by, but research from Money Management’s sister publication Asset Allocator (displayed in Chart 1) shows the average discretionary fund management Balanced model portfolio currently holds around 25 funds.

Steve Buttercase, principal at Verve Investment Planning, is in the process of slimming down client portfolios. Although there is no set size for any one client, the adviser says he is aiming to hold between six and eight funds for a Balanced portfolio, between six and 10 for a Cautious portfolio, and eight to 12 funds for a more aggressive selection. 

Like many advisers, Mr Buttercase plans to blend active and passive: a Balanced portfolio could have 48 per cent of assets in passive funds, but this might drop to 35 per cent for a client at the higher end of the risk scale.

He says the changes are part of a focus on two goals: to deliver annual returns of 3 per cent above inflation over a rolling three-year period for moderate-risk clients, and to keep overall client charges at 2 per cent or lower. He is also keen for the company to communicate transparently in a way clients can easily understand.

Another intermediary, Dennis Hall, is hoping to take a more drastic approach: cutting portfolios down to just two passive funds covering stocks and bonds. Like Mr Buttercase, he sees this as a way to lower overall costs and achieve “marginally better” returns, while making things simpler and more transparent for clients.

“We believe we can provide a better outcome by using a single global equity fund and a single global bond fund, and using them in proportions to an agreed level of risk tolerance,” Mr Hall explains.