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Client Portfolio Management – a valuable client service

  • By Jason Stockwell

Compliance consultant Tony Catt examines the different options advisers face when it comes to the management of their clients’ portfolios


Client portfolio management is one of the most important services offered by advisers to clients. Integrating it effectively with the financial planning process, portfolio management is one of the skills that advisers can use to help their clients to maximise the potential returns on investments. Yet one of the main mysteries for advisers is how best to provide this service – how to provide the clients with a diversified investment portfolio on an ongoing basis that they could not organise for themselves and in a cost-effective manner.

There are several levels of provision that are available:

  • Outsource to a Discretionary Fund Manager
  • Use providers’ portfolio funds – multi-manager or multi-fund
  • Build in-house model portfolios
  • Build bespoke client portfolios

The latter two of these require much experience of investments and of market trends and instruments in order to build the knowledge to differentiate between various fund options. This may be fine for some established advisers who will also need to have the right qualifications to boot, but it is still time-consuming to ensure that their knowledge is up to date and that ongoing competence is maintained. Also, to do the job effectively, the adviser should have the discretionary management permission from the FCA, or they will need to get their clients’ permission before buying or selling any funds. Although, I have seen one firm move all their clients to cash and then contact them! The less said about that the better.

Inside story

I have seen some examples of successful in-house managed, model portfolios, but these can be quite high maintenance. Normally, involving input from several advisers and possibly outside help. The documentation of the research process and making of corresponding investment decisions – as well as the regular reporting on progress to clients – can all be quite onerous in terms of time and resources for the firm.

I once saw an adviser who monitored his clients’ funds daily, which sounds excellent. However, he achieved this by using the same ten underlying funds in all his clients’ portfolios, in different weightings according to their risk tolerances. This may be fine until one or two of those funds start to under-perform and need to be changed.

The main issues involved when managing portfolios focus on doing the background research and monitoring of the underlying holdings, keeping accurate and detailed records and having a robust process about all investment decisions and changes made within the portfolio. Robust being the operative word here, in that client portfolio management cannot be a result of knee-jerk reactions or decisions. The decisions, the transactions and rationales need to be consistent, well thought out and properly evidenced.

In order to operate compliantly with discretionary management permission in line with FCA rules, an individual will firstly require an appropriate investment qualification. That’s the starting point. Also, the discretionary management permission will probably involve an increase in the costs of Professional Indemnity Insurance for the firm itself and more than likely other regulatory and service-related costs too. So, this added cost burden does beg the question whether advisers carrying out the portfolio management function on a part-time basis can produce better results than professional managers who are specialists in this area and who do nothing else.

Looking at the range of collective funds in particular, there is a bewildering array of funds available for consideration. There are active funds, passive funds, OEICs, Investment Trusts, Exchange Traded Funds & Non-Mainstream Pooled Investments, Enterprise Investment Schemes, Venture Capital Trusts and other funds that could be used within portfolios. So, to try and assess which of these may be most appropriate and in which combinations, an adviser is reliant on good quality research tools to help them to filter down to those funds that they believe will be most appropriate to use in a given situation.

There are some good sources of research available from companies such as FE Trustnet and Morningstar. Most of the wraps and platforms have one or other of these or something similar available for use on their portal.

Producing model portfolios in-house gives the adviser firm complete control over the investment strategy used for their clients’ assets. It tends to keep the advisers in more regular contact with their clients, which can be a good thing of course.

The advantage of having properly diversified portfolios in order to manage volatility and risk is well understood. Creating a balance between different asset classes and sectors/geographical areas should mean more consistent returns rather than relying on a narrow investment range that could be hit by local issues. In practice it is not always easy to achieve. However, it is possible to go to the other extreme of having so many funds that performance is totally diluted and any diversification advantages are negated by that dilution.

Use of third party solutions

Outsourcing of investment portfolio management has the advantage that the adviser will be able to focus all their attention and resource on supporting the client through the planning process and nurturing their client relationships. At the same time, the clients will benefit from full-time professional portfolio management through the input of a third party investment manager. All the adviser’s time that might otherwise have been taken up with running portfolios can be re-directed to servicing clients’ needs. All of the record-keeping, management and the PI burden disappear. Expertise is brought in to provide the clients with the potential for consistent investment performance in line with their risk tolerance levels and investment goals. Cost can be a factor of course and transparency is key.

Discretionary Fund Management portfolios tend to be used for larger client portfolios. This can mean an added cost is incurred, but hopefully with a positive benefit in terms of the outcomes achieved. The discretionary fund managers use a wide range of assets, which can include direct investment in shares and gilts as well as selection of appropriate collective investment funds. Such an approach can have real value and should, in theory, lead to consistently better returns in line with the individual client’s objectives.

I have to confess that I am often a little wary when DFMs talk about producing bespoke portfolios for clients. In my experience, these portfolios can, rather suspiciously, end up looking like all the other portfolios from that fund management house. But I am sure that the DFMs could defend that accusation by pointing out subtle differences that a generalist like myself would not notice.

Do DFMs provide better investment performance? This is difficult to assess independently or to confirm as the performance of their portfolios tends not to be published in the same way as it is for retail funds as their objectives can vary so widely.

Many DFMs do offer a personal service in meeting prospective clients and being contactable directly by the clients. Many clients like and value the personal service of meeting the person who is running their investment strategy and this is clearly a tangible benefit.

For most clients, the use of multi-fund or multi-manager funds is the most common type of out-sourcing. These types of funds offer efficient diversification within themselves, offer relatively transparent charges and their performance can easily be tracked by both the clients and advisers

Many providers offer funds that have names such as governed portfolios for example, but these funds are simply very well marketed, re-badged, old-style managed funds. There is nothing intrinsically wrong with these funds, they have always done a decent job. I remember when I was working at Pearl and being advised that their investment aim was always to be above average, not necessarily shooting for the stars.

What about performance?

When it comes to the performance of portfolios, above average is a reasonably ambitious target as by definition half of the funds available will be below average which will impact on an overall portfolio. Such are the vagaries of fund management that many respected fund managers have times when their individual funds underperform when they have taken positions that do not match the current market thinking. Or simply a couple of their bets have not worked out. Advisers will know this all too well.

The principle of diversification is relied upon by advisers, perhaps too heavily in some cases. All too often, I see advisers putting the whole of a client’s investment fund into a single multi-fund on the basis that it offers diversity. It does offer diversity, but it is still only a single fund. In my opinion, this greatly increases the risk of that fund to the client. A medium-risk fund is taken up a notch on the risk spectrum.

I find it difficult to see how an adviser can justify themselves as an investment adviser if all they have done is get a risk questionnaire completed and put all their client’s money into a fund with an apparently matching risk tolerance. Also, if they are simply using a managed fund – and not providing ongoing additional financial planning services and advice – why are they still taking ongoing fees for reviewing a fund that is being reviewed by its own manager?

All too often, I see advisers putting the whole of a client’s investment fund into a single multi-fund on the basis that it offers diversity

So as advisers strive to provide an ever-more costeffective method of providing good investment management for their clients, the outsourcing of portfolio management would appear to offer a good solution. Freeing their time to spend with clients and building the client relationship whilst buying in investment expertise that they may not have – or have to the breadth and depth that is required in order to deliver a compliant service which properly assesses the options available and makes informed decisions as to which combinations are most appropriate. A win-win for everybody.


About Tony Catt

Formerly an adviser himself, Tony Catt is a freelance compliance consultant, undertaking a whole range of compliance duties for professional advisers. info@tonycatt.co.uk

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