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.

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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

Annuities: the comeback kid?

In the 2014 Budget announcement, chancellor George Osborne decreed: “Drawdown and Lamborghinis for all!” Except not really, and you can substitute “Nissan” for “Lamborghini” given the size of many DC pension pots.

In any case, major change is afoot. Responding to this change, Fund Strategy sister-magazine Corporate Adviserand The Platforum are working together to enlighten the market on the evolving retirement market.

The first report in a series of Retirement Funding Guides focuses on how advisers are reacting to the new pension flexi-access rules coming into force this April – are they seeing their pension business growing, what kind of drawdown service will they be offering, and what asset allocation and specific investment products will likely sit within this?

Many advisers tell us they are already seeing new pension clients and more still anticipate taking on a greater number of clients. And most advisers we have interviewed expect to use pension wrappers more, versus Isas.

With little lead time from the Budget announcement, providers are racing to get their existing products (particularly pension wrappers) compliant as well as build new drawdown-appropriate investment solutions for the market. Most asset managers and life companies are yet to take new products to the pension drawdown market.

The majority of advisers we spoke to in December could not name any new product that had caught their eye; some lamented the lack of new options. We have seen a trickle of retirement product launches in January – most recently from Schroders – rather than a torrent.

Asking advisers which specific product types they will be recommending as part of advised drawdown, multi-asset comes out on top by some distance – 60 per cent are likely to recommend.

This likely stems from the belief that by diversifying within the fund, there will be less nasty surprises and therefore less capital erosion for the client. However, a number of industry commentators have exposed the flaws in this strategy, and have instead endorsed the concept of “bucketing” retirement portfolios: segmenting so that money needed for short-term income is kept in cash and bonds with short duration, and money for longer-term income is sat in other bonds and equities.

Adviser opinion is liable to change once more provider offerings for retirement go live, and as the debate continues regarding best practice in asset allocation for de-accumulation. Currently 40 per cent are likely to recommend an annuity; I read this as an underestimation of a product well-suited to clients matching a cautious risk profile, and potentially offering a better, more stable retirement income in some cases.

Annuities may well be the comeback kid of 2015 for another reason: the frequently referenced advice gap. Advisers posit that retirement income decision-making is too important and too complex to be left to the less informed, and they do not tend to have much faith in technology-driven non-advised solutions. Yet many advisers do not want to deal with pension pots of £30-40k, i.e. an average-sized pension pot.

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So what are those with smaller pension pots to do? Tellingly, the FCA commented in its retirement income market study interim report, “… for people with average-sized pension pots, the right annuity purchased on the open market offers good value for money relative to alternative drawdown strategies…”

On the flip side, we have canvassed opinion on the products they see presenting significant regulatory risks when deployed in the retirement market. Almost a third of advisers take issue with capital-protected structured products.

Investment trusts also do not receive a lot of love. Those advising on relatively chunky assets are more likely to see a particular product presenting risks – does this mean that the swathe of advisers with lower personal assets under administration are less aware of the challenges ahead of them?

It goes without saying that there’s great opportunity for all parties – product providers, advisers and consumers – to benefit from the pension rule changes. But the risk of poor outcomes is also great, if these groups are not sufficiently clued up on de-accumulation strategies.

For some, freedom at 55 could mean financial heartache later in life. If Robbie Williams continues to make music (I hope he doesn’t), his lyric “I hope I’m old before I die” might have to be revised to “I hope I’m not broke before I’m old before I die.”

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On Investing

Buckets of consistency

The results of our latest Adviser Survey at The Platforum are in – and 16 months since the RDR came into force, most advisers have their Centralised Investment Proposition (CIP) in place.

Almost three-fifths (59 per cent) say their firm is using a CIP; most of those that have not devised one argue that they are “too small” for this to be appropriate.

Looking at the average percentage of assets channelled into different strategies, model portfolios – either built in-house or supplied by third parties – claim the bulk. OBSR is by some distance the biggest third-party provider, followed by RSM.

The proportion of assets going into multi-asset and multi-manager solutions is on the rise – up by six percentage points since last quarter, while bespoke fund picking of single-strategy funds has retreated by four points.

Risk profiling is at the heart of many centralised propositions, with risk-rated multi-asset solutions and model portfolios continuing to be the outsourced solutions of choice. Tech companies providing risk profiling and asset allocation tools must see business booming.

Having a consistent investment process within an adviser firm is part and parcel of ensuring greater professionalism, and making clear to the end client the service (rather than, as in ye olde days, the product) being provided.

Yet there is concern in the industry about the limits of questionnaires that place investors in one risk bucket – and therefore one strategy – over another. Maybe it is because I’m a qual-y rather than a quant-y, but I could not help agreeing with an adviser who said to me recently, “Call me old-fashioned, but I prefer to talk to my client about their lifestyle and their goals, and from that decide what level of risk is right, as just one of several factors I look at.”

Another popular CIP is exemplified succinctly by this adviser describing his firm’s approach: “We have our own model portfolios in-house which we use for the middle band of clients. Above that is bespoke products and for the lower band we use a multi-asset fund.”  Indeed, we hear a lot about client segmentation based on portfolio value and resulting in bespoke service for higher value and off-the-shelf solutions for lower.

The chart above largely reinforces that this is a popular way of structuring a CIP – although we do see business being outsourced to discretionary managers at a lower level than some would expect.

Again, some question whether this is the right way to segment a client base. It seems to stem (understandably) from which services can be provided profitably, and the assumption that lower-value clients have more straightforward requirements. However, a competing view is that clients with £50k may still not fit an Architas or a Vanguard LifeStrategy fund, and conversely a client with £150k could well do. Just as the results of a risk questionnaire may not tell the whole story, the size of the pot probably should not determine investment approach.

I’m not suggesting that advisers shouldn’t be adopting such CIPs – as long as there is an acceptance on the adviser’s part that while 95 per cent of clients may fit, 5 per cent may require something outside of the CIP.

Encouragingly, advisers I have spoken to on the subject do acknowledge this.

My final forewarning is that, increasingly, firms will have to assess whether their offering is sufficiently different/superior to what is available in the execution-only space. One described their CIP as “ETFs managed by a DFM on a model portfolio basis”. Sounds like what Nutmeg offers D2C to me.

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On Investing

Don’t forget the little guys

So much trade press attention is aimed at what the IFA nationals and networks are doing. Are the big guys moving to a restricted model? What do their centralised investment propositions look like? How do these service (or not) the mass affluent, who previously had access to advice but now face being labelled ‘undesirables’ from a profitability standpoint

There is less of a focus on smaller IFA firms, unless it is in the context of consolidation or doubting their viability. The FCA and others have cited a critical mass needed for an adviser firm to run profitably on its own steam.

At one of our Platforum Adviser Roadshows back in April, technical specialist at the FCA Rory Percival commented on how one-man bands would carry the load of new regulatory requirements, questioning their ability to do so without outsourcing some functions. And a recent CWC Research report produced in association with Fidelity FundsNetwork highlights the need for sufficient resource to cover the increased cost of research, compliance and admin, as well as deal with greater complexity of regulation, IT etc. Apparently 13 is the magic number – three managers, eight advisers and paraplanners, and two admin bods.

As part of an ongoing project, we have been speaking to adviser firms across the size spectrum, to better understand how business models are shaping up in the ‘new world’ and which third-party providers have become the biggest influencers in fund selection. It is very much a work in progress, but we do already have a sample of 50 smaller firms we have mapped out in some detail. These have an average of five registered individuals (several are one-man bands) and a median assets under administration of £50m.

platform_660So how are these smaller firms picking funds? Are they outsourcing much of the investment decision-making process, as many in the industry would expect? Showing a perhaps surprising commitment to being whole-of-market, only three firms in this group are restricted and 70 per cent are using three or more fund platforms. Three out of the four only using one platform use Transact, which is certainly one of the most ‘open architecture’ platforms out there.

Two-thirds of the firms in this group tell us they are still picking funds for clients on an individual basis, and two-thirds are utilising model portfolios constructed in-house. In fact, only three adviser firms out of the 50 told us they were outsourcing fund picking entirely.

Looking at the outsourcing going on amongst this lot, they are light on third-party model portfolios; only 16 per cent use these, with OBSR the most popular choice.

It is the use of DFMs that appears to be most common; 42 per cent are calling on their services at least some of the time. Given the number of times Brewin Dolphin is mentioned and cross-referenced with AUA figures, we estimate that it is influencing a maximum of £560m of the total AUA of £5.9bn shared between the 50 firms. Brooks Macdonald looks to be influencing a maximum of £495m, Quilter £221m, and Investec Wealth £170m.

A third of these IFA firms are using multi-manager funds, but naturally those third parties providing the funds are less ‘influential’ than the DFMs in terms of the AUA they command. Architas, Jupiter, Henderson, Vanguard, 7IM and Standard Life feature most strongly, influencing levels of assets that amount to a drop in the ocean when recalling that £5.9bn figure.

The chart illustrates how influential these outsourcing partners are in terms of proportion of the 50 small firms using them, against what that means in assets. So Brewin is Top Gun on both counts. As you would expect, each of multi-manager and model portfolio providers commands relatively tiny amounts of dosh.

Bottom line? The small IFA firms are alive and kicking; they are still big fund pickers and need to be marketed to; and when they are outsourcing this this can entail big sums for providers, not to be sniffed at. We are also starting to have conversations with the biggest adviser firms, so will soon be able to compare and contrast with the investment strategies and specific outsourcing partners they’re using. But for now, the message to the fund management community is this: do not forget the little guys.

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On Investing

Managers better start swimmin’

To quote the oft-maligned but brilliant lyricist Bob Dylan: “The times they are a-changin’” – and fund managers need to take note.  Every time we start working on the latest quarterly Adviser Platform and Distribution Guide there are new market entrants to discuss, shifts in the investment strategies adopted by intermediaries, new flavour-of-the-month funds and sectors. Not to get over-philosophical, but it is astonishing how quickly the landscape changes.

The ongoing march towards centralised investment propositions has continued into the first quarter of this year. CIPs are very much on the lips of advisers, providers and the regulator. Model portfolios were used for 42 per cent of an adviser’s clients. Of these, 10 per cent were entirely outsourced and 32 per cent were governed by internal investment committees. Use of models is on the rise in particular for clients with ample portfolios of £100-500k (up 4 per cent) and £1m-plus (up 6 per cent).

Perhaps unsurprisingly, the use of multi manager has declined across client segments and is now used on average for 19 per cent of clients, compared with 27 per cent a year ago – and this percentage falls to a relatively meek 9 per cent for clients with portfolios of between £500k and £1m. With the near-daunting array of options in the multi-asset space, it is becoming ever more difficult for advisers to spot quality, and for providers to stand out in the crowd.

Now that the RDR dust is beginning to settle, will adviser propositions include an execution-only route, to service certain types of clients?

Some 26 per cent will look for execution-only service from platforms in 2013, based on perception that this is the direction that the market is taking. However advisers are fairly tentative in exploring this option in greater depth, knowing that profitability will be a challenge and that it could prove time-consuming to find a solution that is fit for purpose. Those against the idea may feel that execution-only goes against advisers’ core belief in ‘the value of advice’, or be wary of the regulatory quandary regarding ‘is it advice or not’ when you are charging for it.

With advisers still engaging in fund picking for on average 31 per cent of their clients, it is as important as it has ever been to hear from them what products they are considering for them. Other than mutual funds (unit trusts/Oeics), cash products are the most likely to be included in client portfolios this year (53 per cent), followed by bonds (42 per cent) and investment trusts (41 per cent).

Exchange traded funds also appear to be a relatively appealing feature in the portfolio mix, with 38 per cent of advisers likely to include these. In terms of ‘big change’, equities have seen a real boost in propensity to use – up to 37 per cent from 27 per cent in the previous quarter. There are also upward shifts in expectation to include other types of investment vehicle, which may ultimately be driven by some advisers’ desire to remain independent. Watch this space for how many actually will remain so in 12-18 months’ time.

Turning to sectors, the UK takes both first and second place on the list of highest selling IMA sectors on-platform during the first quarter, with UK All Companies and UK Equity Income; these took the second and fifth spots respectively last quarter. For the other sectors to make the top five for highest sales, “The name’s Bond” – Sterling Strategic, Sterling Corporate and Global.

The top selling fund on-platform in the first quarter was Standard Life Investments’ GARS fund, with Invesco’s High Income and Dimensional’s Global Short-Dated Bond funds hot on its tail. None of these made the top three in the fourth quarter of 2012 – in fact Dimensional was nowhere on the top 20 to be seen. First State’s  Global Emerging Markets Leaders and Asia Pacific Leaders are the fourth and fifth highest sellers on platforms respectively.

With £6.72bn new business on platforms in the first quarter and 68 per cent of new adviser business held on-platform, fund managers would be foolish not to keep a keen eye on developments in this market.

To close with a little folksy advice from Dylan: “Come gather ‘round people/ Wherever you roam/ And admit that the waters/ Around you have grown/ If your time to you/ Is worth savin’/ Then you better start swimmin’/ Or you’ll sink like a stone”.

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