“If you break it you own it…”Mike Mount, of JM Finn, gives an alternative view about the benefits for advisers and their clients of outsourcing the investment management process

by | Sep 6, 2017

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 Setting up and running an in-house investment proposition, whether on an advisory or discretionary basis, is a lot of spadework. Practical considerations that come into play are legion, not least how to find and hire the right people to run your proposition, ensuring you incentivise them in such a way as to retain them into the future. This is so important to get right as there are various plates spinning in the air when running an in-house proposition – researching the fund universe (both active and passive in these post-RDR days), meeting with fund managers, executing fund switches and rebalance trades, investing new monies, using the annual CGT allowance and so on. Having laboured to put such a proposition in place, it would be more than a headache to see those people walk out of the door to the rival planning firm down the road…

 

The same side of the table

 
 

But the main reason for considering an outsourcing model is, I believe, one of control.   Whenever I find myself engaged in a discussion about the benefits of outsourcing, I often recall a meeting with a financial planner in late 2009, some months after the worst of the financial crisis but still very much a time of uncertainty. The planner had got in touch to say that he wanted to discuss the idea of outsourcing and so we set up a meeting to discuss how we might be able to help. After the usual pleasantries and some back and forth about the typical topics related to an outsourcing model – improved risk management, wider research capability, increasing regulation on the horizon – I made a throwaway comment that made him sit up and engage whole-heartedly. The comment was something along the lines of, “of course, if you decide to outsource the investment, then you will be on the same side of the table as your client for both the financial planning and the investment piece.”

This had struck a chord with him because from late 2007 he had found that wearing two hats – one as the planner and one as the investment manager – had caused nothing but headache. Performance of the advisory portfolios he ran had not outperformed the benchmark on a relative basis, one fund had been spectacularly poor, another fund had been frozen temporarily and a couple of the absolute return funds had been nothing but an absolute disappointment. Client reviews had, as a result, become something to dread; the review of the financial plan was usually fine but when it came to donning the investment hat and discussing the performance of the portfolios, he could sense that the dynamic of the meeting had shifted to become defensive. He would imagine that the client was looking at him while at the same time thinking ‘perhaps someone else could do better with the investment’.

To make it worse, he could give no proper answer to clients who would ask how things could be improved – he found himself trotting out the usual clichés of long term investment, the fund manager’s strategy being not quite right for the current market conditions, ‘black swan’ events and so on. None of this was a remedy, and he certainly could not fire himself for poor performance. And so he would spend more time on researching funds and trying to predict tactical asset allocation tilts that might help to claw back performance, all against a background of extreme market volatility and uncertainty.

 
 

For better or worse

The story reminds me of a quote attributed to Colin Powell in 2003 when, as US Secretary of State, he was advising then-President George W. Bush on the possible pitfalls of the planned invasion of Iraq – “if you break it, you own it” he said. His point being that if the invasion of Iraq went ahead, then the US and their allies would have to bear responsibility for the aftermath, for better or worse. Those same cautionary words can apply to various industries and professions but are just as pertinent spoken to a planner considering carrying out the investment piece on his own – this sage advice, for me, underpins the debate for a financial planner to consider a strategic move away from a business model where investment is done in-house to one that embraces outsourcing.

 An in-house proposition means that you own the performance – for better or worse. Being optimists on the whole, we tend to think that those worse times will never materialise, but they do. Since the financial crisis of 2008/9 markets have recovered their losses and volatility seems to have been dampened down considerably – political and economic news is shrugged off as markets around the globe hit new highs. In such a benign environment most people are happy to ‘own the performance’ but will it be the same if things begin to unwind?  A conversation with a client during the good times is a pleasure. Portfolios up on an absolute basis and possibly also on a relative basis. But imagine if markets were to experience another severe downturn that reverses those returns – now it is not such a pleasant conversation and, crucially, the options to do anything about it are limited. Do you fire yourself or the team you have put in place? How do you win back your client’s confidence?

 
 

However, with an outsourcing model in such a bearish scenario you at least have options to consider because you are now, quite simply, aligned with the interests of your client. No longer are you being judged on your portfolio management skills; instead you are monitoring the DFM – or panel of DFMs – and so can make the call on behalf of your client to either put the DFM on notice or even to replace them if performance has been poor and no satisfactory explanation has been offered. This, I believe, is the strategic crux at the heart of why small to medium-sized planning firms consider the benefits of outsourcing.

So, if you are at that strategic crossroads and wondering what to do, you could do worse than to remember that great line in ‘The Leopard’ by GiuseppeTomasi di Lampedusa – “for everything to stay the same, everything must change.”

About Michael Mount

Mike is director of intermediary solutions. He orchestrates a team within JM Finn that builds and manages Centralised Investment Propositions for intermediary firms via wrap platforms. He joined JM Finn in 2010 from Barclays Wealth where he ran long only portfolio distribution, promoting bespoke, multi-manager and index-based discretionary portfolios to high net worth clients across the UK, Europe, Middle East and Africa (EMEA). He is a chartered member of the Chartered Institute for Securities & Investment and is a graduate of the London School of Economics. A former officer in the Brigade of Gurkhas, he commanded a reconnaissance unit of Gurkha paratroopers for two years and served predominantly in Asia. 

mike.mount@jmfinn.com

 

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