We are seeing a shift to ‘insourcing investment’, says Chris Gilchrist, director of FiveWays financial planning. He explains more.
A year ago the adviser press was full of stories about outsourcing investment. Advisers couldn’t hack running model portfolios, people argued. It was better to choose external discretionary fund managers (DFMs) and delegate to them.
“We believe we need to get across why we are doing what we are doing.”
Since then the game has changed radically. A raft of managers will now manage model portfolios for advisers on wraps, so that all the reporting tools and wrap functionality are available to adviser and client. Most DFMs now concede that the adviser has to stay in control of the client relationship, and since many no longer have authorised advisers of their own, they are in no positon to actually do the necessary initial suitability assessments.
So we’re seeing a shift to ‘insourcing’ investment, and since we’re at the last stage of implementing our insourcing propositions, advisers may find our experience helpful in shaping theirs.
Stage 1: Write your CIP. It is your firm’s statement about why and how you do investment. Do you believe in 31active or passive funds/styles or a combination? Do you believe in strategic or tactical asset allocation? How do you implement it? In client portfolios, what constraints do you place on the number of funds, geographical or asset class exposure? We went through five iterations of this before we reached FINAL.
Stage 2: Choose a risk profiling process you can apply to all clients. We don’t believe you can use the output of an Attitude To Risk questionnaire to instantly allocate clients to portfolios. You have to have a capacity for loss assessment in the middle. So we chose a suitability assessment system, Harbour, that includes and records capacity for loss, experience/knowledge and risk tolerance.
Stage 3: Recruit an external member to your investment committee. We were lucky: my old mate Mark Dampier introduced me to recent retiree Phil Case - he’d spent 30 years with NatWest doing fund and manager selection. Perfect - he knows everyone and asks as many awkward questions as I do.
Stage 4: Decide what client segments you want distinct propositions for. For example, you might choose to use different solutions for accumulation and decumulation, regardless of the sums involved. We decided not to offer any of our own propositions to low-value drawdown clients: we use a cheap off-the-shelf managed-risk lifeco solution.
Stage 5: Create a panel of apparently suitable but different DFMs. Our initial selection included bespoke, models on wrap and multi-asset OEIC ranges. Try and eliminate those that obviously don’t fit - we eliminated bespoke early on, except as a niche offering. Working out how consistent DFMs’ processes are isn’t easy.
Stage 6: Waltz with your partners before… We slowly negotiated our way to Appointed Investment Adviser status with Parmenion, who did a lot of analytical work before agreeing to run eight model portfolios using our asset allocation and our fund selections on their platform. They are represented on our investment committee and we work within their due diligence framework. Another DFM has done a lot of work on our existing model portfolios to show how they would manage client money - for complicated HNW clients - on Nucleus and Standard Life wraps. In both cases, we have significant input on asset allocation and fund selection: they are our models as much as the DFMs’.
Stage 7: Communicate. We’re still working on this - what we think is good and useful isn’t the point, it’s what the clients think that’s important. But we believe we need to get across why we are doing what we are doing. Everything we do is under the FiveWays brand and label, which we want to steadily enhance.