Too much information

The explosive growth of fund supermarkets and life company fund platforms has changed dramatically the ways in which many of us work. The choice, the transparency and the access to information are all welcome and create an almost infinite range of possibilities for those advising clients on investment. But all of this does come at a cost and for advisers it is the burden of processing the volumes of information, in order to give best advice.

Every week, there seems to be yet another press release from a provider informing us of more funds being added to an already vastly extended fund range. Choice is great but too much choice, running into literally thousands of funds, can eventually cause a “reasons why” headache.

Ideally, fund analysis should generate a full understanding of what each manager is trying to achieve, the degree of risk they are prepared to take, as well as the extent to which they have been successful in the past.

In reality however, client recommendations more often come down to a level of trust in a manager’s ability to continue to outperform. And as we all know: “Past performance is not a guide to the future.”

The FSA is quite clear that, subject to status, professional advisers have an on-going responsibility to ensure the funds they recommend remain suitable throughout the term of the investment. This means ensuring the funds chosen remain appropriate to the reasons why at outset, as well as checking a client’s needs have not changed.

Advisers who do not conduct these reviews are taking a very real risk; it is not just the client who is facing a nasty surprise if their fund’s objectives change over time.

And in practical terms, the more time an adviser has to spend analysing funds and reviewing past recommendations, the less time they are able to dedicate to seeing new, and existing, clients. Typical portfolio sizes and commission structures mean that very often advisers cannot profitably offer the bespoke service that might be ideal but which, in the real world, will not be justifiable for many clients.

Scottish Life believes there is a way of addressing this challenge. Instead of swamping advisers with a massive range of investment options, life offices can help by using their own in-house expertise and resources to do much of the analysis at their end. If they have a recognised, trusted and consistent process, then a provider can be of huge help to advisers by reducing the universe of funds to a smaller, more manageable — but still quality — core, from which value-adding recommendations can be made.

This is not only a service to intermediaries, it also represents an evolution of the role of the life office. It is an acknowledge-ment that many intermediaries want to recognise more than standard managed funds. And, at the same time, it creates a new role for the life office, offering analysis and an overview of governance as well.

In this new relationship, the life office has graduated from a neutral provider of fund links, to a more active multi manager. This could mean a fund of funds role, analysing and grading the funds in the market. However we think the manager of managers route is even better. This is a structure, more often favoured in institutional fund management, in which the client sets a mandate, in terms of style, risk and returns, then selects managers to deliver against it.

Any manager who strays — in terms of performance, or style, or the risk they embrace — can be replaced, thus preserving the mandate itself, which remains constant. In this way, the life office is also taking on a shared responsibility for governance issues as well.

With this sort of menu to choose from, advisers are enabled to do what they are best at — understanding the client in terms of lifestyle needs, time horizons and appetite for risk. Once they have done that, it becomes much easier to choose from a pre-set range of clearly mandated funds, rather than the entire marketplace of existing unit trusts, investment trusts and Oeics.

Some life companies have already begun this journey and provide specific managed portfolios that match recommended asset allocation strategies to individual client risk appetites and time horizons. Extending this to enable components to be fulfilled by well-researched external fund links can add further real value to the advisory process.

While such an approach might reduce the analysis burden, it does not of course take away the issue of on-going suitability. Naturally, the adviser is best placed to determine whether a client’s needs have changed from the time of original advice.

However, it is a fair assumption that provided the client’s circumstances are still true and the selected funds’ objectives and risk profiles remain constant, then the recommendations at outset would remain appropriate for some time.

Life offices are constantly searching for new ways to help advisers and the potential roles will change as markets evolve.
Providing access to professional asset allocation strategies that reflect both risk and duration, supported by an ongoing monitoring process that ensures that the strategies remain true to their original objectives, will surely add value to most businesses. It also secures a new, but still pivotal, role for the life office in the financial planning process.

Adam Davey is investment marketing manager at Scottish Life