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.
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.