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

Advisers’ platform choices reveal their colours

The type of platform favoured by an advisory firm is usually a good indicator of what type of firm it aims to be. The platform due diligence required by the FCA means that advisers have to document the reasons behind their choice of platforms – this forces them to evaluate their client book and select the platforms that best meet their needs.

All 20 or so adviser platforms have their peculiarities; however we can categorise the platform market in a number of ways: size, relative suitability for different client segments, degree of vertical integration etc. Most simplistically, the industry tends to make a distinction between the oldest, biggest three platforms in the market – Cofunds, Fidelity FundsNetwork and Old Mutual Wealth – and the newer offerings. These first three are commonly referred to as fund supermarkets, which offer fewer types of investments and tax wrappers and historically ran a remuneration model based on rebates.

Conversely, the ‘wrap’ platforms are so-called because they are seen to offer a wider range of investment options – ETFs and DFM access, for example – and tools. These platforms have operated an explicit charging model since their inception.

Advisers still predominantly using the fund supermarkets look quite different from those wedded to the wrap platforms. Segmenting the two groups by the platform they use the most, we can learn a fair bit about the different types of advisory businesses in the market. The chart below illustrates how investment propositions vary depending on primary platform used. Bear in mind that although an adviser may tell us that their primary platform is Cofunds, they are still likely to be using one or even multiple other platforms.

advisedasset_620

Still, the disparity between the two groups is stark. In the wrap camp, advisers are placing significantly more assets through in-house model portfolios. The fund supermarket loyalists, on the other hand, still have the bulk of clients’ assets in bespoke portfolios – mostly designed in-house. Roughly a fifth of the wrap group’s assets are managed by DFMs on a model or bespoke basis, compared to a tenth of the fund supermarket group’s assets.

What strikes me when looking at these research results is the extent to which a certain segment of the advisory firm has changed little in response to the RDR. These – mostly one-man band or similarly small firms – have not left the profession in droves as predicted. Yet the sustainability of their business model has been thrown into question. Very recently I spoke to an adviser at a mid-sized firm, who made the point very clearly to me: “Most IFAs don’t have a research team that is big enough or a process that is robust enough to strip out fund managers they know and enjoy, and pick the best funds for their clients. Advisers should be out seeing clients and winning business.” On the flip side, it may be more difficult to articulate one’s value as an adviser if this doesn’t include fund selection. Damned if they do, damned if they don’t, you could say.

Over the past few years, consolidator firms have been hoovering up some of these smaller firms. This acquisitive activity looks set to continue. Consolidators seek to bring acquired business into the fold of their centralised investment process. This is a challenging task involving a lot of extra communication with clients to convince them to accept a portfolio revamp, but once achieved it will see a shift away from bespoke portfolios.

A potential decline in the number of one- or two-man bands will have an impact on the platform market. One may expect wrap platforms to be the main recipients of new clients; net sales data over the past 18 months supports this, and for the first time in the first quarter of this year, the collective market share of the three fund supermarkets fell below 50 per cent. However, Old Mutual Wealth now offers a host of OMGI-managed investment solutions that could plug the gap. I also suspect that over time, portfolios built via fund supermarkets will start to look more like those on wraps. Many advisers now believe that for accumulation portfolios at least, there is less need for individually-tailored portfolios – the bulk of clients have quite similar needs and fall into a narrow band of risk profiles.

And if nothing else, regulatory pressure will drive conformity. “If you don’t want to get shot, don’t go into a warzone,” exclaimed one high-end IFA to me. Unless, I suppose, you have a sufficiently substantial battalion in tow.

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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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On Investing

2015 to be the year for a major shake-up in the use of fund platforms

Tis the season for speculation! My final [Fund Strategy] piece of 2014 is a digest of tentative predictions based on both data and gut feel.

We will likely see a significant shake-up of the platform market in 2015 as the conclusion of the sunset clause for legacy business draws closer. By April 2016, all investments on-platform will be – to use the sometimes unhelpful but most widely understood terminology – “clean”. As financial advisers decide how best to conduct the share class conversion exercise, some may also find the moment apt for re-thinking their platform strategy.

The Platforum’s Q4 research into the adviser platform market gives a nod to this potential shake-up. The chart shows responses to the question: “Are there any redundant or ‘legacy’ platforms within your business that you plan to place minimal or zero new clients on?” The three largest adviser platforms in the market typically suffer worst by this measure of sentiment.

Conversely when we ask more broadly which platforms advisers would consider using for writing new business, there is a significant proportion of non-users who would entertain the idea of adopting at least one of the Big Three.

Without delving into the data too deeply on this occasion, the overriding message seems clear: the mood is ripe for big changes in platform use amongst advisers in the next 12 months.

Moreover, shifts in platform use will likely be a product of advisers continuing to restructure their investment propositions. A small advisory firm continuing to pick funds in-house to date may well re-evaluate, decide it is best to outsource the investment piece and switch to a platform that provides access to a suitable discretionary fund manager.

Seven Investment Management and Parmenion are good examples of platforms that often form an integral part of users’ centralised investment proposition. Many users of Seven IM embrace its passive multi-asset funds and model portfolios in addition to the platform engine; the same is true of Parmenion and its risk-rated models.

Equally, some outsourced solutions – be they discretionary model portfolios or risk profiling and asset allocation systems – may start to look not so hot in the light of the FCA’s thematic review into retail advice due diligence (expected to drop in H1 2015). A chunk of hitherto advocates may then wish to re-jig their propositions, which would impact on their platform due diligence.

Thinking about the nature of business being written on platforms, the general feeling is that open architecture will continue to lose ground as managed solutions and vertical integration in the advised space both become more prevalent, and execution-only platforms funnel assets with favoured funds list and their own investment solutions. Yet we would accuse those pronouncing, “Open architecture is dead!” of hyperbole.

More likely is that we’ll see polarisation in the market. Some IFAs will make it their business to remain whole-of-market and wedded to a platform with a more comprehensive range of investments like Transact or Ascentric. At the other end of the scale, we anticipate that more providers will follow Old Mutual Wealth’s lead, promoting a set of investment solutions and buying up distribution.

Having visibility on the fund managers booking the most new business via platforms, I feel reasonably confident betting on passive funds gaining greater market share in the retail arena in 2015. Vanguard makes the top five for third quarter net sales on all adviser platforms that supply us with this data. Smart beta house Dimensional also receives a couple of mentions in this respect. One platform reported third quarter net sales comprising 35 per cent passive funds. On execution-only platforms, price slashes on passive funds make the case for these investments stronger for many consumers.

Incredibly for all the noise made about the lack of efficacy of active management and the cost involved, passives struggled to gain a bigger piece of the pie this year. I believe this is partly owing to a mentality that proving oneself as a sophisticated fund selector means picking active funds. However the net sales data suggests that the tide is slowly turning.

I would not necessarily extend this view to include the institutional world, where one day you hear that pension funds are considering moving more money into passives to rein in costs, and another that pension fund managers have their eyes locked on hedge funds and real estate to make higher levels of return. Go figure.

So in short, Santa has in his sack considerable changes in platform use, polarisation in the adviser market between the truly independents and the vertically-integrated firms, and a good year ahead for passives. Enjoy the festive period, and drown out the new Band Aid noise pollution with “Fairytale of New York” if you can.

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