Our recent article on Adviser Investment propositions and the research undertaken by FE raised some interesting points so I met up with investment consultant, Ian Furtado (IF) to see whether it was representative of some of the conversations he is having with financial advisers.

Ian is a consultant working with The Adviser centre and he specifically helps advisers with their investment proposition. This involves either reviewing and constructing the proposition or giving ongoing support for due diligence or the investment committee.

Discus: Ian, what were the key points in the research which resonated based on your experience in the market?

IF: The research indicated that 46% of adviser use external model portfolios wit 84% of those using more than one and the majority (53%) using between two and four. However whilst the survey indicates that the majority of them review their investment proposition annually, in my experience there are a surprising number of firms that outsource to Discretionary Fund Managers (DFMs) but don’t actually check and perform an adequate periodic exercise. This should include formally refreshing and documenting their understanding of the particular investment manager, strategy and offering.

Of course, they might rely upon each respective firm to communicate these things, however that is not the same as ensuring they are protecting and maintaining their clients’ interests. After all, how many managers are going to specifically refer to staff turnover or the real reasons for a period of underperformance?”

Discus: In your opinion, how robust are adviser processes when researching and reviewing their investment proposition?

IF:  I have found that firms do indeed think about this aspect of their process. Reflecting further though, I had an interesting conversation with a Principal recently – she had recently undertaken several DB transfers for a particular company and wondered if her firm’s research and documentation was actually robust enough to satisfy not just the regulator, but in fact her PI insurers too.

She is naturally keen to try and control the anticipated spiralling cost of protection and I would venture that while processes are pretty robust, it’s not actually always clear what challenge the firm is expecting and from which quarter.

Discus: The FE survey indicated that 79% of firms have an investment committee. What are your observations on these?

IF: I agree that a high number of firms do indeed have investment committees, however I wonder about how they are made up and if they do actually have any independent input view and constructive challenges. Invariably, a firm will identify suitable individuals from around the business but a consequence can often be groupthink or consensual agreement driven by the most vocal (and senior) member – further, I wonder how a firm might benefit from new ideas e.g. new managers or a challenge to inherent biases or beliefs. It only takes one idea to be adopted to pay for the cost of an independent voice multiple times over.

Another interesting feature I’ve noticed is the use of more than one multi-manager type vehicle in the name of diversification. This was supported by the FE survey which suggested that 73% of advisers undertake this activity.

This blending of too many holdings has unintended consequences and it is important that advisers have sufficient knowledge of what their asset mix might actually achieve under various market scenarios. Of course the issue here though is available time and expertise within the adviser business to undertake this analysis.

Discus: In summary, why are you seeing advisers using services such as yours?

IF: That’s an easy one and the answer is twofold: time and volatility. Staff costs are the biggest cost in a services business and fee earners should be encouraged to do exactly that – which is why it makes sense to subcontract to a cost-effective, experienced, external resource.

Many investors will have had a shock when they reflected on market movements in October and that increased volatility has reminded Financial Advisers that the past (QE asset fuelled) few years have been kind to portfolios. The future is about to become far more challenging and I expect to be even busier helping firms to ensure they have sufficiently robust processes in place for the investment proposition.

Discus: Thanks Ian!

A copy of the FE Research paper can be found here, and all comments welcome!


This article was created for the DISCUS website following a DISCUSsion with Ian Furtado, Investment Consultant at The Adviser Centre. You can learn more about The Adviser Centre on their website.