When it comes to building effective portfolios for clients, Damien Rylett of Brunel Capital Partners argues the case for making sure that the portfolio fits the client’s financial plan.
Many clients – retirees in particular – will rely on their investments to help fund their cash needs and lifestyle. When it comes to portfolio management, there are generally two ways we can approach this: yield and total return. I shall consider both of these below:
- A focus on yield
This first approach primarily looks to obtain interest and/ or dividends from securities and avoids touching principal in order to deliver the income required by the client. In low yield environments, investors using this approach may search for securities with higher yields to meet their cash flow needs. If yields are high enough, investors may be able to live off the income from their portfolio dividends and interest without having to touch principal. This approach may appeal to those who believe that selling principal reduces the longevity of their portfolio and who prefer the discipline of living off portfolio income rather than delivering a sustainable annual withdrawal from their portfolio.
- Total return
This alternative approach which is focused on achieving total return involves selling assets in the portfolio to synthetically create cash flow. This method reflects the idea that, from an investment standpoint, it makes little difference whether returns are delivered as dividends or capital gains. We are advocates of the total return approach. We believe that it allows greater control over the amount of cash flow generated because it does not depend on how total returns are split between yield and capital appreciation. Focusing on income-orientated investments can result in unintended biases in a portfolio. Biasing a portfolio towards stocks with higher dividend yields or bonds with increased yields will likely change a portfolios risk and return characteristics.
Focusing on income-orientated investments can result in unintended biases in a portfolio.
For a total return investor, once the overall allocation decision has been made on the basis of total portfolio risk and return, the income produced becomes a by-product. Rather than letting portfolio yields determine spending rates, investors can develop a sustainable withdrawal strategy with their financial planners based on their own individual lifestyle needs.
Putting clients’ needs first
Identifying and quantifying the current and future cost of an investor’s lifestyle is a fundamental part of the financial planner’s role and will form the basis of a comprehensive financial plan. Through planning and the use of modelling, we can identify and calculate the investment rate of return which the client needs in order to achieve their lifestyle and other planning goals. Once this is known – and only after a plan is in place – do we turn to constructing a suitable portfolio to help the client to achieve these goals.
We have a saying in our business of “no plan-no portfolio”. This means that the only basis for an investment portfolio is a plan.
We have a saying in our business of “no plan-no portfolio”. This means that the only basis for an investment portfolio is a plan. A portfolio is never an end in itself, it is a means to the end of a plan.
Keep it simple
As financial planners, we are faced with a huge choice of investment solutions to meet our clients’ needs. All we need is a return to drive the plan. Surely, a simple, cost-effective, low-cost solution will do that? We have tended to find that most of the investment solutions on offer from traditional investment managers and discretionary fund managers (DFMs) didn’t do simple. The investment management industry has made a habit of making this simple, complex.
A bespoke solution
This is why we established our own investment management firm, IronBright, and built our own solution. The solution has been built by financial planners for financial planners and allows them to concentrate on what they do best, financial planning.
The solution is evidence-based, low-cost and globally diversified. It focuses on delivering risk-rated portfolios that can be perfectly matched with a client’s financial plan.
Because it has been built by financial planners, it is very different to the solutions offered by many investment houses. With patience and discipline as two of our guiding principles, we don’t believe in tactically adjusting portfolios or trying to second-guess what is going to happen. Each portfolio is strategically asset-allocated with the aim of providing a long-term return based on historical asset class returns. Once in place, it is left to do its work, aside from half yearly re-balances. If your client’s portfolio is intrinsically linked to a plan, why would you change it if the client’s objectives – and hence their plan – hasn’t changed?
Simplicity, transparency and liquidity
You won’t find anything exciting in the portfolios either. If any asset class or fund fails our three mantras test of simplicity, transparency and liquidity, it doesn’t go in. Years of experience as financial planners of having to deal with clients and the fallout from the likes of structured products, commercial property funds, hedge funds etc. led to our three mantras test. Therefore, you won’t find any of these complex, unnecessary “alternative” asset classes in the portfolios. This also includes derivatives, absolute return funds, a host of other alternatives and synthetic ETFs.
As a result, performance has not suffered and our aim of providing a long-term, predictable return so our clients can achieve their goals is being achieved.
Investing should be simple and boring and do the job that it is intended to do which is to help meet the clients’ goals and objectives as part of the financial plan.
IronBright portfolios are available to selected financial planning firms. For details visit www.ironbright.com
About Damien Rylett
Damien is Managing Director at Brunel Capital Partners and Pilgrim Financial Planning, both Chartered Financial Planning firms. He is also CEO of IronBright Investment Management and a Director at the Financial Planning Training Academy. Damien has worked in Financial Services for 20 years, starting his career at Standard Life. Prior to establishing Brunel in September 2011, he was a director at Broadoak Group which was acquired by Chartwell in 2007 and then by Close Brothers is 2011. Damien is married to Clare with three boys, Isaac, Jacob and Noah. A rugby coach at Bristol Bears Academy and Gordano RFC, Damien says he loves making a difference to people’s lives through every part of his professional and personal life.