On Investing

Asset managers must adapt to new gatekeeper approach

Asset management businesses are grappling with some serious challenges at the moment. Reshaping their relationships with intermediaries in a post-commission world and identifying who the investment decision-makers really are in the remodelled advised market are arguably chief among these.

The starting point for meeting such challenges is understanding the increasingly important role being played by the company-wide, or centralised, investment process (CIP). For the majority of advisory firms, this has become the way that investment business is done. Almost four-fifths of advisers report that their firm has a centralised investment process in place; 84 per cent of advisers adhere to one if you exclude one-man bands from the numbers. These stats are encouraging. Many firms have responded to regulatory change and gone a long way to implementing processes that help individual advisers deliver investment advice consistently across a firm’s client bank.

The acronym CIP is bandied around, reverberating off the walls of City offices when talk turns to how to engage with today’s (and tomorrow’s) brand of advisory firm. But what actually is a CIP?

Sometimes the P stands for process; other times proposition. Thinking about process, firms are increasingly implementing measures that allow them to deliver consistent investment advice: an investment committee with ultimate decision-making power, risk profiling to help determine asset allocation and a centralised investment proposition to map on to the desired asset allocation. Often, there is also a process through which advisers can make a special case for deviating from the centrally-imposed parameters.

CIP

A rising proportion of advisers are buying into the concept of a CIP – both process and proposition. Waning support for bespoke portfolio design is indicative of this general trend, with Platforum research proposing a ratio of bespoke to model solutions (including model portfolios and fund of funds) of 45:55.

Many advisers are embracing model portfolios on the grounds of business scalability. Using an attitude to risk questionnaire linked to a set of model portfolios means that advisers can take on more clients and give more attention to the wraparound financial planning service. This point is of growing relevance to DFM businesses providing investment management for advisers’ clients – there will be a limit to the amount of outsourced bespoke business they can take on. DFMs we speak to echo that bespoke treatment for asset allocation and fund selection isn’t necessary in the majority of cases. Moreover, the additional cost for a bespoke portfolio that looks very similar to one of the model portfolios is being called into question. A minority of clients have particularly complex needs, or simply want the experience of bespoke because they like the feel of the premium customer service. For the rest, bespoke portfolio services probably don’t represent good value for money.

Growing support for model portfolios goes beyond pragmatism, or fear of the regulator. To some extent, the shift seems to reflect a relatively new philosophical belief in how investment advice should be given. Exemplifying the point, one adviser told me: “I believe in a replicable process. I previously worked at a firm where two virtually identical clients were invested in different funds – why would that be? Why would you have a bespoke approach for everyone? You bespoke the tax wrappers but not the fund selection.”

Investment decision-making is becoming increasingly centralised within advisory firms, as well as more broadly. Similarly, client portfolios are purposely being designed to look more alike within individual firms and across the advised market, thanks to CIPs and the shift towards model solutions. Change has been positive insofar as firms have undoubtedly become more professional in how they handle investment business. However, change is also driving greater fund concentration, which in turn raises a number of issues for the industry.

What we’ve been preaching for some time now is that fund houses need to refocus their sales efforts. The challenge is no longer how to sell to individual IFAs; it’s how to sell to investment committees and gatekeepers, as well as individuals in some instances. Moreover, salespeople need to be more alert to where advisers perceive gaps in their in-house or bought-in fund panels, and conversely the product areas for which they really don’t require a ’me too’ fund. Thinking about the implications of fund concentration for the investment team, difficult decisions have to be made about capacity issues, and how one accommodates increasingly lumpy inflows and outflows as funds are added and removed from CIPs. Such are the ugly truths about advisers’ model behaviour.

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On Investing

How ‘open’ are open architecture platforms really?

In the UK and, indeed, across Europe, investment platforms have been hugely important in powering open architecture for institutions (banks and insurers), financial advisers and the end investor. Platforms are often termed ‘fund supermarkets’; users can chuck anything in their shopping basket with no restraint or possible bias other than affordability, although product positioning and special offers are designed to guide the consumer to the most profitable lines.

One French platform revealed that their top 30 funds typically receive 85 per cent of net inflows; a Luxembourg-based platform reported that 85 per cent of assets are held by the top 20 managers despite making available close to 400 fund managers; and the top 20 names represent 60 per cent of platform assets for a major Swiss platform. What are the reasons behind this concentration, and how ‘open’ are open architecture platforms really?

Concentration has historically been high in Europe, but the tide is turning as major Italian tied networks embrace third-party funds and the banks in Spain gradually open up to non-proprietary products. Across the region the likes of M&G Investments and others with blockbuster funds gain ground with big distributors. MiFID II could intensify concentration as the rebate incentive is removed in some channels, or encourage wider choice as consumers wise-up to cost and demand better options.

In the UK, there have been two conflicting forces at play. On the one hand greater professionalism among advisers has meant a reduction in fund manager concentration overall as they move beyond over-reliance on two or three of the biggest fund houses, or engage with DFMs who pull from a wider range of investment products on their behalf. However, on the other hand some players are including fewer funds in investment propositions to cut down on due diligence work and employ better negotiating power with fund managers, or are using investment solutions instead of bespoke client portfolios.

Fund and fund manager concentration is also driven by the machinations of the platforms themselves. Many providers have asset management capability, and thus are more inclined to promote proprietary products. Others were originally developed to sell proprietary investment products via internal channels, and have only more recently extended their remit to external advisers and third-party products. Looking at the UK market, the clout of an in-house manager varies hugely, accounting for anywhere between 10 per cent and 40 per cent of a platform’s assets.

Old Mutual Wealth (previously Skandia) exemplifies the growing trend towards vertical integration in the platform market. The provider has its WealthSelect range of sub-advised funds for advisers, and the Cirilium range run by Old Mutual Global Investors for the Old Mutual-owned network, Intrinsic. And let’s not forget the recent Quilter Cheviot acquisition.

In a role reversal, D2C leader Hargreaves Lansdown has become a fund manager in its own right by building on its range of multi-manager funds. The Wealth 150 researched fund list is the shop window display, and each multi-manager fund a ‘three-for-two’ offer in prime position on the shop floor.

Where platforms are not running funds themselves, there is still incentive for them to steer flows. The range of funds is narrowed by providing investment solutions and select lists, making it easier for larger platforms to negotiate down asset management costs and bolster margins.

We wanted to give some insight into what products are most commonly appearing in platform users’ shopping baskets. We asked the major UK B2B platforms to share the top five fund managers by assets under administration on their platforms. The groups who responded had combined assets under administration of £208bn at the end of September 2014. The resulting infographic takes into account both how frequently fund managers featured in top five lists and the relative sizes of the platforms.

topmans

Naturally, the fund managers affiliated with a platform have relatively strong clout, as well as the likely suspects of Invesco, M&G, Jupiter Asset Management and BlackRock (including iShares). Dimensional and Vanguard have been relatively popular on the smaller, newer platforms that have always had an unbundled pricing model, while investment solution providers 7IM and Omnis (the in-house manager for the Openwork network) also feature as top managers.

One suspects that vertically-integrated platforms will continue to see growth in in-house investment product assets. Meanwhile, the more ‘open’ platforms may see passive fund managers eat into the share of assets held by the asset management incumbents, and thus reduce concentration. The UK platform market continues to support different business models and offerings, in spite of the nay-sayers who believe that the market is too crowded.

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