JUNE 2024
Advisers tap model portfolios for efficiency boost
4,000
UK Financial Conduct Authority-registered financial adviser firms are currently using MPS
In this Watchlist...
The MPS sector is expected to continue to dominate as advisers seek relief from investment complexity and regulation
odel portfolio services are projected to grow to £154bn by 2028 and their increasing popularity reflects their importance for financial advisors and their practices.
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The business of investment management is increasingly complicated because Consumer Duty means advisers who continue to manage client portfolios themselves face rules akin to asset managers. As a result, a growing number of advisors prefer to rely on MPS to manage assets and focus their efforts on financial planning and maintaining client relationships.
In our exclusive Watchlist, we hear from managers at 8AM Global, Brewin Dolphin, Quilter, Quilter Cheviot, Tatton and Timeline. They discuss the trends and themes driving the sector and explore why:
• Investors may not need to choose between active and passive strategies • Home bias should be a thing of the past • Advisers should be rethinking how to manage investments for clients • That there has never been a better time than now to be an adviser • Read the latest on issues in the sector
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When passive is active – the rise of ‘passive plus’ managed portfolios
In defence of a bit of active management in your portfolio!
Data-driven edge: Delivering consistent performance for advisors
INSIGHT
Q&A WITH...
David Hood, Head of Managed Portfolios
Stuart Clark, Portfolio Manager
Building an efficient investment process
Lothar Mentel, CEO and CIO
The time is now – there’s never been a better time to be an IFA
Antony Webb, Head of MPS Investment Funds
Building an improved service — the best of both worlds
MPS WATCHLIST
Timeline’s unsinkable ship
Regional asset allocation – does domicile matter?
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Shorter term Active manager quality is statistically relevant over consecutive 12 month periods >
Alpha has a clear lifecycle >
Ash Weston, Head of Managed Portfolios
“The options available to you are to make tiny bets that will have marginal impact if they go right or wrong - OR make massive bets and (to quote The Dark Knight ) “Die a hero or live long enough to become a villain” and eventually erode your portfolio to dust”
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“Statistically we know that the market will do what is necessary to prove the majority wrong (and occasionally the contrarian manager right)”
The answer is an entirely human instinct that the “grass must be greener” and given that we’re acting in the best interest of the client – completely understandable.
If an investment team creates a strategy that is designed to outperform and offer value over a rolling 5-year period – what do they do when investors won’t tolerate even slight underperformance for more than 24 months on average? Statistically the 3-year performance of a traditional multi-asset house has only a very slight correlation with the ability of that strategy to outperform over the following 12 to 36 months.
Clearly not every provider can sit in the top quartile against their peers over every period, but increasingly investment managers are punished (by both the markets and client allocations) for adding any beta to a portfolio at all. Don’t get me wrong – I think the values espoused by investment managers 20 years ago of “conviction” and “bravery” are about as relevant to producing long term investment returns as a “fear of flying” or “strong swimmer.” However, the current value set being rewarded by much of the marketplace is really the absence of identifiable process to outperform at all, remaining invested and accessing the market at the cheapest possible rate.
Don’t worry – I’m not going to get on a soapbox and claim passive doesn’t offer a straightforward solution for a huge percentage of the market.
iven that we all accept that providers are objectively trying to make our clients money, why do we sit and do the same dance with clients at review, where assets move from strategies that have slightly underperformed to strategies that have massively outperformed?
Is every active manager that outperforms just lucky?
Are they all deliberately trying to pull the wool over our eyes and protect a dying industry? Are we (as we are all told endlessly) eroding client returns by trusting active managers?
So then, given the ubiquitous and simple outcomes of passive why bother with the risk and inconsistency of active…ever?
If you populate portfolios with purely passive funds, you create a nice broad exposure that will produce market returns over longer time periods, doing both better and worse over shorter horizons than other, more concentrated strategies; and hopefully adding alpha via whatever tilt to allocation they proffer as effective – this is the only outcome for low concentration portfolios.
This is the view of lots of other evidence-based houses. This is (in my opinion) perfectly logical, but is the easy route and leaves a tonne of potential alpha on the table. The trick is to access equity concentration for a meaningful percentage of the period that it adds alpha, then reducing concentration or moving to another sector whilst still being “up” on the trade.
Clearly that sounds too good to be true – nobody can reliably predict sector rotation or forthcoming thematic sentiment within a broad multi-asset portfolio. Bang on – nobody can. The options available to you are to make tiny bets that will have marginal impact if they go right or wrong - OR make massive bets and (to quote The Dark Knight™) “Die a hero or live long enough to become a villain” and eventually erode your portfolio to dust. I’ve never seen any convincing data that shows that any multi-asset investment team can (consistently) add value via tactical asset allocation.
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But.
Hold a single active manager that’s making tactical calls for long enough and they invariably will disappoint relative to the market at some point. Statistically we know that the market will do what is necessary to prove the majority wrong (and occasionally the contrarian manager right).
Sometimes.
To my main point – statistically your allocation should be relatively neutral to avoid significant error and underperformance. Many of the underlying funds should be passive as the larger markets are relatively efficient and are becoming more efficient. But to remove all active managers, for all time for all sectors – is (data-backed) folly.
I won’t spoil the surprise – but funnily enough, we’ve developed a successful methodology to identify value in active fund managers (hint: it’s not all the time). Which has led to us successfully add alpha in every IA sector , that we monitor – consistently. Rather than blind you with maths, I’ll leave you with the two principles that inform our approach:
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1. Observed as percentage of episodes of rolling 12-month periods in which AQ fund picks outperformed relevant IA sector average.
The aim for every multi-asset strategy is to add value right? Nobody builds an investment strategy with the closeted aim of underperforming their benchmarks or creating a difficult, opaque environment by which to compare the relative value of their proposition, says Ash Weston, Head of Managed Portfolios at 8AM Global.
iven that we all accept that providers are objectively trying to make our clients money, why do we sit and do the same dance with clients at review,
where assets move from strategies that have slightly underperformed to strategies that have massively outperformed?
Paul Hogg, Head of Distribution
“While traditional multi-asset approaches can offer the allure of outperformance, the reality is that achieving alpha through prediction and short-term market timing is extremely challenging – statistically impossible to do consistently”
Evidencing value
AQ identifies fading alpha through multi-factor analysis and operates a dispassionate sell discipline. It helps advisors to demonstrate value by providing concrete evidence that fund selections are made in the client's best interest with value that’s easy to define.
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4/ 4
Managed expectations
The data-driven approach of AQ helps firms achieve consistent and repeatable results, offering greater predictability of returns. Move beyond the boom-and-bust cycles of traditional active management and deliver consistent, explainable value for your clients.
3 / 4
Enhanced efficiency
AQ streamlines the investment process. When clients' portfolios are managed objectively, they are free from the effects of the pressure to justify risky decision-making. We rhythmically monitor the relative performance of all potential investment funds for indications of momentum shifts. No lengthy debate, just calculated action.
2 / 4
Clean decision-making
By removing human emotion from the fundamental parts of the equation, AQ eliminates the potential for behavioural biases to negatively impact portfolio performance. Data-driven decisions ensure a disciplined and objective approach. The objective criteria and simple rules used for investment selection become more transparent. Helping clients to understand the "why" behind their portfolio allocation and giving greater insight into the value offered by repeated optimisation.
1 / 4
The AQ addresses these challenges by leveraging the power of data and the scientific method to deliver consistent and efficient outcomes for your clients.
The 8AM AQ MPS advantage
Fixed ideology
Markets are cyclical. What works well today might struggle tomorrow. Passive funds perform well during periods of thematic oscillation and broad-based market moves however, when opportunities within more concentrated parts of the market arise, the active manager can take advantage.
4 / 4
Inflexibility in dynamic markets
Markets are constantly and rapidly evolving. As new technologies emerge and customer preferences shift, the most effective tool in the professional investors toolbox is the ability to respond and adapt to change. Conventional rebalancing cadence often struggles to adapt quickly enough to capitalize on changing conditions, or pump the brakes and protect downside.
Tactical positioning
Predicting short-term market movements is a near-impossible feat. Human limitations in processing complex data and reacting swiftly, or by committee can erode value, bringing outcomes to the result of luck over judgement.
Emotional bias
The pressure to perform can lead to subjective decision-making influenced by biases like overconfidence, the endowment effect and loss aversion. These biases cloud judgement and lead to suboptimal, inconsistent outcomes.
The world is constantly advancing and so too should our approach to creating investment solutions. Beyond pure strategy, solutions must be client-centric and structured to help avoid foreseeable harm. These are just a few of the key challenges that when addressed, can offer tangible benefits to advisors & clients alike.
Calculated action
This surge reflects the increasing demand for efficient, scalable investment solutions as the cornerstone of a strong centralised investment proposition.
Yet, as a financial advisor, finding and implementing a robust, efficient, and consistent MPS partner, remains a core challenge.
While traditional multi-asset approaches can offer the allure of outperformance, the reality is that achieving alpha through prediction and short-term market timing is extremely challenging – statistically impossible to do consistently. This can create a sense of uncertainty for both adviser and client and make it difficult to:
8AM’s AQ MPS offers a unique, simple and effective solution for firms looking to achieve consistent results, rapid response to changing market conditions, and to easily communicate that value to their clients.
AQ's proprietary algorithms filter and rank large volumes of fund data, helping to significantly reduce the negative impact of human bias. This objective approach allows AQ to manage client money with transparency and accuracy, rather than relying on clairvoyance or subjectivity.
Have confidence in the long term prospects for a strategy
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Explain the decision-making process made on their behalf by the investment team - creating additional friction for the client experience.
he Model Portfolio Service (MPS) market has witnessed explosive growth, with UK sales comprising over half of all investment sales in the second half of 2023, according to ISS Market Intelligence.
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The world is constantly advancing and so too should our approach to creating investment solutions. Beyond pure strategy, solutions must be client-centric and structured to help avoid foreseeable harm.
he Model Portfolio Service (MPS) market has witnessed explosive growth, with UK sales comprising over half of all investment sales in the second half of
2023, according to ISS Market Intelligence.
The value of investments, and any income from them, can fall and you may get back less than you invested. Neither simulated nor actual past performance are reliable indicators of future performance. Performance is quoted before charges which will reduce illustrated performance. Forecasts are not a reliable indicator of future performance. Investment values may increase or decrease as a result of currency fluctuations. Information is provided only as an example and is not a recommendation to pursue a particular strategy. RBC Brewin Dolphin is the sponsor, investment manager and distributor to certain funds. RBCBD applies robust conflict
management practices and disclosures to ensure these funds and relevant services are appropriate to meet client needs. RBC Brewin Dolphin and its employees do not receive additional remuneration or non-monetary benefits when a client invests in these funds or investment solutions. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. RBC Brewin Dolphin is a trading name of Brewin Dolphin Limited. Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register reference number 124444) and regulated in Jersey by the Financial Services Commission. Registered Office; 12 Smithfield Street, London, EC1A 9BD. Registered in England and Wales company number: 2135876.
RBC Brewin Dolphin offers three different MPS services which are available on 20+ key platforms: Managed Portfolio Service, Passive Plus MPS and Sustainable MPS. For more information visit brewin.co.uk/intermediaries.
Performance since inception
Source: RBC Brewin Dolphin.
IA Mixed Investment 40-85% Shares (45.22)
UK CPI
Balanced Portfolio Performance ON Passive Plus (48.86)
David Hood, Head of Central Investment Solutions
“Passive investments can play an important role in a client’s portfolio, but having an in-depth understanding of the growing market provides a challenge to advisers. ‘Passive Plus’ managed portfolio services can serve as the ideal solution”
“Not only is there room in any given client portfolio for a combination of active and passive investments, but no two indices are the same”
Graeme Bowden, Regional Sales Manager
While such choice can be viewed in a positive light, it has made life harder for financial advisers. Clients, given the option of DIY investing, have questioned advisers’ fees, while the plethora of funds available have made it challenging for advisers to actively search the whole market for the most appropriate investment solutions.
It’s unsurprising, then, that many advisers have turned to managed portfolio services (MPS) to do much of the heavy lifting. Indeed, over the five years to September 2023, MPS have grown at an annual rate of 10.9%, with their share of adviser platform assets rising from 45% to 50% .
For advisers, the benefits of MPS are clear – not least that it enables them to outsource the day-to-day management of their clients’ investment portfolios while preserving their client/adviser relationships.
Another key trend in recent years has been the rise of passive investing, largely through index-tracking funds and products. In 2023, for example, investments into US passive funds surpassed investment in active funds . One of the key drivers here is cost, with investors scrutinising fees charged by fund managers against the performance of passive versus active funds.
he investment landscape has undergone massive change in recent decades. The proliferation of technology, including apps and platforms, has put some investment decisions into the hands of retail investors. At the same time, the funds universe has expanded to include sectors and asset classes not previously widely available to the public.
Not only is there room in any given client portfolio for a combination of active and passive investments, but no two indices are the same. It’s arguable that the level of research required in selecting passive funds has become as high as for active funds.
So, it’s a natural progression that MPS with a focus on passive investing found their way into the marketplace – creating a place where passive investments are actively researched, selected and monitored.
This is an area that RBC Brewin Dolphin has been very active in. We launched our MPS offering in 2008, making it one of the longest-running MPS products in the market. We subsequently launched our ‘Passive Plus’ MPS in 2016 having identified a gap in the market. Together with our Voyager fund range, which follows the investment approach of MPS but in a unitised structure, we centrally manage £8bn AUM.
Today, there are seven distinct Passive Plus portfolios selected by our in-house, expert research team, each catering to a specific attitude to risk – Cautious, Cautious Higher Equity, Income, Income Higher Equity, Balanced, Growth and Global Equity. Financial advisers match their clients to one or more of these portfolios and monitor their ongoing suitability.
Critically, these portfolios have lower fees than those holding active funds, owing to the nature of the underlying assets. What’s more, the portfolios are tactically adjusted (rebalanced) every month. This is to reflect our asset allocation committee’s view on the most appropriate mix of assets for a given investment objective and any key changes taking place in the market. Our in-depth research covers thousands of investment products.
While passive funds may be attractive from a cost and ease perspective, one of the key downsides is the potential impact on clients when any given index experiences a correction. As a result, some of our Passive Plus portfolios invest in a diversified, global basket of alternative assets through the inclusion of the MI Select Managers (MISM) Alternatives Fund, which can offer exposure to commodities, real estate, private equity and tactical credit.
This can help hedge against sudden index downturns and support portfolio diversification, which we believe should typically include alternative assets.
As those in the financial sector are all too aware, rules and regulations on the provision of advice – such as the Retail Distribution Review and, more recently, Consumer Duty – have added an extra layer of complexity by rightfully demanding more transparency and accountability, and that value is delivered to investors.
Not only are the constituent funds of the Passive Plus portfolios available on the RBC Brewin Dolphin website, so are the Defaqto qualitative review reports, thus giving added transparency and third-party analysis.
In a constantly evolving industry, the shift into MPS not only brings cost efficiency for advisers and their clients, it also outsources increasingly complicated asset management and portfolio responsibilities. This allows advisers to spend more time on core financial planning and building and maintaining important client relationships, all the while retaining discretionary control over their clients’ accounts.
While the debate about active versus passive has dominated many recent investment conversations, there is a risk that it is reduced to an either/or discussion. The reality, however, is not quite so binary.
A perfect blend?
1. Model portfolios projected to grow to £554bn by 2028, Money Marketing, 30 January 2024
2. Passive funds leave actives languishing, Financial Times, 15 March 2024
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For financial advisers, the choice between active and passive investment strategies is no longer binary. Managed portfolio services are increasingly targeting index-tracking funds in an active and dynamic manner, as RBC Brewin Dolphin’s David Hood, Head of Central Investment Solutions and Graeme Bowden, Regional Sales Manager, explain.
The value of investments, and any income from them, can fall and you may get back less than you invested. Neither simulated nor actual past performance are reliable indicators of future performance. Forecasts are not a reliable indicator of future performance. Investment values may increase or decrease as a result of currency fluctuations. Information is provided only as an example and is not a recommendation to pursue a particular strategy. RBC Brewin Dolphin is the sponsor, investment manager and distributor to certain funds. RBCBD applies robust conflict management practices and disclosures to ensure these funds and relevant services are appropriate to meet client needs. RBC Brewin Dolphin and its employees do not receive additional remuneration or non-monetary benefits when a client invests in these funds or investment solutions. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. The Sustainable MPS model portfolios promote investment into firms with positive environmental, social and good governance characteristics, but they do not have sustainable investing targets. Due to the sustainable focus of this portfolio, there are companies and sectors in which we are unable to invest, meaning the portfolio's performance may be lower than that of an unconstrained investment portfolio with the same benchmark. RBC Brewin Dolphin is a trading name of Brewin Dolphin Limited. Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register reference number 124444) and regulated in Jersey by the Financial Services Commission. Registered Office; 12 Smithfield Street, London, EC1A 9BD. Registered in England and Wales company number: 2135876.
decisions into the hands of retail investors. At the same time, the funds universe has expanded to include sectors and asset classes not previously widely available to the public.
he investment landscape has undergone massive change in recent decades. The proliferation of technology, including apps and platforms, has put some investment
Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. The Sustainable MPS model portfolios promote investment into firms with positive environmental, social and good governance characteristics, but they do not have sustainable investing targets. Due to the sustainable focus of this portfolio, there are companies and sectors in which we are unable to invest, meaning the portfolio's performance may be lower than that of an unconstrained investment portfolio with the same benchmark. RBC Brewin Dolphin is a trading name of Brewin Dolphin Limited. Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register reference number 124444) and regulated in Jersey by the Financial Services Commission. Registered Office; 12 Smithfield Street, London, EC1A 9BD. Registered in England and Wales company number: 2135876.
“Considering the recent changes in the capital gains tax allowance over the past couple of years, advisers with clients in general investment accounts sometimes feel it is better to have those capital gains kept within the fund rather than outside in an MPS”
“We can arrange to have bespoke investment management agreements with third-party fund houses, and this allows us to use RBC Brewin Dolphin's size and scale to negotiate on behalf of advisers and their clients”
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There are a number of features that we believe differentiate our MPS (Managed Portfolio Service) range but the main thing that marks us out is our MI Select Managers fund range, which we launched over six years ago. It enables us to have segregated mandates within portfolios, allowing us to diversify portfolios and control costs for investors while remaining transparent about what we hold in those funds.
In terms of cost, we can arrange to have bespoke investment management agreements with third party fund houses, and this allows us to use RBC Brewin Dolphin's size and scale to negotiate on behalf of advisers and their clients.
The most recent MI Select Managers fund was the MI Select Managers Alternatives Fund which was launched just over two years ago. It gives investors exposure to investments like gold, investment trusts and even more esoteric strategies like catastrophe bonds.
Many of these would normally be difficult to hold in an MPS, for reasons that could include liquidity or a lack of the ability to fractionally deal in them. Holding these assets within the MI Select Managers Alternatives Fund really broadens the diversification we can offer.
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In a very crowded MPS marketplace, what makes RBC Brewin Dolphin stand out?
Cost is only about price but what is important for investors is the value of a proposition; and that includes everything from total cost management charges to platform costs and any other charges, and the overall service received.
Our offering is very competitive given the level of active management we provide within the portfolios. All our active managers are screened and monitored by our expert fund research team who conduct regular meetings with fund managers to better understand their investment views. As mentioned earlier, RBC Brewin Dolphin uses its size and scale to create cost efficiencies on behalf of advisers and their clients.
You mentioned costs as a standout and Consumer Duty focuses on fair value. How do the two align?
We see the monthly rebalancing of portfolios as a benefit. Our asset allocation committee meets monthly, and we think it is prudent that their latest views are reflected quickly into clients' portfolios.
It also gives us an opportunity to reflect on any changes in our fund team’s views and we can quickly act if they have found a new manager who they believe can offer outperformance in a particular area, or conversely, if they’ve lost confidence in a manager.
We also have the ability to make intra-month changes within the MI Select Managers funds and we can act swiftly within those structures.
Rebalancing portfolios isn’t consistent across the industry. Why do you rebalance monthly?
Choice is important. Some advisers are making more extensive use of our Voyager fund range, which is really a clone of MPS but in a fund wrapper. Considering the recent changes in the capital gains tax allowance over the past couple of years, advisers with clients in general investment accounts sometimes feel it is better to have those capital gains kept within the fund rather than outside in an MPS.
We also have a sustainable MPS range, and it has performed well in its peer group with consistent inflows since launch in April 2021. Although sustainable investing hasn't been particularly in vogue over the last couple of years, our sustainable MPS is a strong proposition, and we believe that investors will have a renewed interest in sustainable investing again.
Advisers need a partner who is alive to changes in the sustainability landscape and can have confidence that what they're investing in is doing what it says it does.
For example, the Financial Conduct Authority, recently released its Sustainability Disclosure Requirements. That’s going to stipulate exactly how sustainable propositions are marketed and delivered. The industry has lacked clarity, this is going to be very important, and we welcome that.
We have a research team of over 30 people and have the depth and breadth of resource to follow up on controversial fund holdings, lobby for change and hold fund managers to account.
What factors should advisers consider when choosing a DFM partner for their MPS needs?
Q&A
with...
David Hood
Delivering value: How choice and cost align
Diversification, cost control, and access to diverse strategies can give advisers an edge, says David Hood, RBC Brewin Dolphin’s Head of Central Investment Solutions.
Click here to find out more about the WealthSelect Managed Portfolio Service.
Important information Past performance is not a guide to future performance and may not be repeated. Investment involves risk. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Because of this, an investor is not certain to make a profit on an investment and may lose money. Exchange rates may cause the value of overseas investments to rise or fall. www.quilter.com Please be aware that calls and electronic communications may be recorded for monitoring, regulatory and training purposes and records are available for at least five years. The WealthSelect Managed Portfolio Service is provided by Quilter Investment Platform Limited and Quilter Life & Pensions Limited. “Quilter” is the trading name of Quilter Investment Platform Limited (which also provides an Individual Savings Account (ISA), Junior ISA (JISA) and Collective Investment Account (CIA)) and Quilter Life & Pensions Limited (which also provides a Collective Retirement Account (CRA) and Collective Investment Bonds (CIB)). Quilter Investment Platform Limited and Quilter Life & Pensions Limited are registered in England and Wales under numbers 1680071 and 4163431 respectively. Registered office at Senator House, 85 Queen Victoria Street, London, United Kingdom, EC4V 4AB. Quilter Investment Platform Limited is authorised and regulated by the Financial Conduct Authority. Quilter Life & Pensions Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Their Financial Services register numbers are 165359 and 207977 respectively. VAT number 386 1301 59. Quilter uses all reasonable skill and care in compiling the information in this communication and in ensuring its accuracy, but no assurances or warranties are given. You should not rely on the information in this communication in making investment decisions. Nothing in this communication constitutes advice or personal recommendation. Data from third parties (“Third-Party Data”) may be included in this communication and those third parties do not accept any liability for errors and omissions. Therefore, you should make sure you understand certain important information, which can be found at www.quilter.com/third-party-data/. Where this communication contains Third-Party Data, Quilter Investors cannot guarantee the accuracy, reliability or completeness of such Third-Party Data and accepts no responsibility or liability whatsoever in respect of such Third-Party Data.
Andy Miller, Lead Investment Director
“When done properly, outsourcing your investment service can be seen as a natural extension of your firm’s advice service”
”You may be delegating your investment management process – but you are not delegating your responsibility to your clients”
reating and managing an efficient in-house investment process is now more challenging than ever, thanks to the uncertain economic backdrop, and the ever-evolving needs of your clients. But in particular, the introduction of the Consumer Duty, with the requirement to demonstrate that services meet the needs of each client, deliver the right outcome, and provide value, has made running advisory portfolios much more challenging. As a result, the level of expertise, time, and resources required to manage portfolios now far exceeds what was required previously.
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If you are still carrying these costs, outsourcing can deliver increased margins as well as a range of other operational, regulatory, and investment efficiencies. It can also deliver greater productivity by reducing the administration and research required to build, monitor, and report on your in-house portfolios.
To illustrate the current cost pressures on adviser firms, let’s imagine you have a client with £150,000 in an advisory portfolio who pays an ongoing advice fee of 0.5%. That amounts to an annual fee income of £750. With a typical hourly rate for an adviser of, let’s say, £150, this means that if you spend any more than five hours on this imaginary client, they will actually be loss-making for your adviser firm. Faced with such realities, the next question becomes whether you can run an in-depth and efficient investment process, as well as provide a financial planning service, and - under your Consumer Duty obligations - demonstrate it is delivering appropriate client outcomes, all within the five hours allotted?
The commercial conundrum
Some advisers will, of course, have the resources and in-house expertise for this, but for many others, this simply isn’t possible. The silver lining is that outsourcing the day-to-day investment management of your client portfolios can alleviate the mounting regulatory strain on you and your business and free-up your time and resources. This helps ensure your clients receive ongoing advice that’s appropriate to their needs, and that’s cost-effective and sustainable. This improves profitability and can help drive positive client outcomes for your clients.
The silver lining
Finding the right investment manager to delegate your investment process reduces the need for expensive in-house investment expertise as well as the analysis systems and regulatory costs that now accompany the management of client portfolios.
Client and adviser benefits
When done properly, outsourcing your investment service can be seen as a natural extension of your firm’s advice service. It allows you to focus on aligning solutions with your clients’ needs and helping them achieve their financial goals.
Outsourcing also enables your clients to benefit from an enhanced investment process. Whether that’s better research capabilities, a wider range of investment options and asset classes, more developed responsible and sustainable investment options, or the attraction of tapping into a more robust due diligence process. Additionally, the requirements under the Consumer Duty, such as Assessment of Value, will be done for you.
All these elements ultimately help to deliver better client outcomes, and rigorously demonstrate that you are doing so.
Where outsourcing proves its worth is in reducing the regulatory risks shouldered by advisers, helping to reduce costs and to increase profitability, and to underpin stronger client outcomes.
Aligning interests
For many advisers, utilising a reputable managed portfolio service like WealthSelect will be the solution to these regulatory, commercial and client considerations.
WealthSelect consists of 56 portfolios including responsible investment options, with a choice of active, passive, and blended investment approaches, to offer a choice of pricing points, and eight different, forward-looking risk levels.
WealthSelect is underpinned by an established investment team with a robust and rigorous process. It has over 30 dedicated investment professionals ensuring the best investment choices are made for the best client outcomes.
Outsourcing to WealthSelect
There are a range of powerful regulatory and commercial considerations that have made many advisers rethink how to manage investment for clients as Andy Miller explains.
reating and managing an efficient in-house investment process is now more challenging than ever, thanks to the uncertain economic backdrop, and the
ever-evolving needs of your clients. But in particular, the introduction of the Consumer Duty, with the requirement to demonstrate that services meet the needs of each client, deliver the right outcome, and provide value, has made running advisory portfolios much more challenging. As a result, the level of expertise, time, and resources required to manage portfolios now far exceeds what was required previously.
Availability: The breadth of platform availability should offer some steer on the current and future utility of the MPS service. Price: A ‘value for money’ assessment should sit alongside any nominal fee analysis. Does the MPS management fee seem fair? Are the costs of the underlying funds reasonable? Does the performance and service inform good ‘value for money’? Investment excellence: Experience should form the centrepiece of any analysis with potential MPS partners. Does the offering party showcase sufficient breadth and depth in their investment capability and does this resource support decision making that aligns with the philosophy of the MPS? Returns: Performance analysis should reflect several metrics, including returns achieved relative to any stated benchmark or peers, but also risk metrics and whether any volatility targets have been met. Time horizons selected to conduct such analysis are also crucial in this exercise and should be reflective of the ambitions of the client. Service: Support analysis may come later in the due diligence process, given the natural inclination to first look at price and performance. Invesco believe service should carry an equal weight in determining any final decision. Performance and process tells only part of the story – absent a coherent articulation of what is going on in portfolios and why, it is very difficult to gain sufficient understanding of portfolios. Without such insights it would be very difficult to host genuinely engaging meetings with clients. Investment risks The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Important information This content is for Professional Clients only and is not for consumer use. All information as at 30 June 2023 and sourced by Invesco, unless otherwise stated. Views and opinions are based on current market conditions and are subject to change. Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.
Stuart Clark, WealthSelect Portfolio Manager
“The biggest challenge that many advisers face is having an investment solution that offers enough choice. The new, post-Consumer Duty, outcome-based era of advice means there’s no longer room for ‘one-size-fits-all’ solutions”
“Today’s time-constrained advisers have responded well to this as it empowers them to deliver a more personalised investment service, and one that helps meet the regulatory requirements incumbent upon them”
We launched WealthSelect in 2014 to meet the evolving needs of advisers and their clients. We started out with a range of 16 actively managed and blended portfolios (combining both active and passive funds) offered across eight, clearly defined risk-bands.
In 2022, we introduced another eight passively-managed portfolios to sit alongside the original offering, added a full range of active, blended and passively-managed responsible portfolios, and launched a range of actively-managed sustainable portfolios, bringing the total number of portfolios in the range to 56.
This evolution has made WealthSelect one of the most comprehensive managed portfolio services in the UK, enabling us to offer a suitable investment solution to a wide range of potential investors.
Today’s time-constrained advisers have responded well to this as it empowers them to deliver a more personalised investment service, and one that helps meet the regulatory requirements incumbent upon them.
Due to adviser demand, we have now made the WealthSelect Managed Portfolios available beyond Quilter’s platform, with the portfolios added to the Parmenion, M&G, and Morningstar platforms. Meanwhile, we’re actively exploring other platform tie-ups so we can reach more financial advisers.
WealthSelect celebrated its tenth anniversary in February 2024, what have been the major developmental milestones along the way?
The success of WealthSelect is that it enables advisers to effectively outsource the management of investment risks to our dedicated team.
The biggest challenge that many advisers face is having an investment solution that offers enough choice. The new, post-Consumer Duty, outcome-based era of advice means there’s no longer room for ‘one-size-fits-all’ solutions.
In order to provide a solution that’s the best fit for each individual investor and their evolving needs, an outsourced investment solution needs to offer a broad range of easily understood risk levels, an aligned investment process that encapsulates these risk levels, and the ability for your clients to move freely up and down the risk ladder as needs dictate.
It also needs to offer a choice of investment styles and a range of different pricing points to optimise customer choice. Likewise, it needs to offer a range of well-defined responsible investment options that provide the same range of investment styles and pricing points.
WealthSelect offers all of this as well as its compelling performance track record – one that advisers can illustrate to their clients as having delivered consistently strong performance in both rising and falling markets.
How does WealthSelect help advisers?
The WealthSelect Managed Portfolios were launched during a period of extraordinarily low interest rates, low inflation and quantitative easing, which bears little resemblance to today’s world.
A couple of years after launch we were dealing with the implications of Brexit, then 2018 started with President Trump’s opening salvo in a long-running trade war with China. Next, we were dealing with the ramifications of lockdowns due to the coronavirus pandemic.
By 2022, Russia’s invasion of Ukraine had triggered a blistering rise in energy costs that resulted in supply-chain blockages that helped to drive inflation to 40-year highs. This culminated in a cost-of-living crisis and the most aggressive interest rate-hiking cycle in a generation.
During our first decade we saw significant rotations within equity and bond markets. Most recently we’ve seen the continuing dominance of the US equity market, led by its mega-cap technology names, most notably the so-called ‘Magnificent Seven’.
Throughout it all, our pragmatic approach has delivered robust, consistent returns to investors with our broad portfolio diversification helping us to ride out the worst of the downturns along the way.
What have been the biggest investment challenges over the last 10 years?
Stuart Clark
Reflections on 10 years of opportunities and challenges
The WealthSelect Managed Portfolio Service recently celebrated its tenth anniversary. We sat down with Portfolio Manager, Stuart Clark, to look back at the last 10 years and what WealthSelect has achieved for advisers and their clients.
Select a circle to view that portfolios attributes
Simon Doherty, Investment Manager
“We are proactive, dynamically reflecting our “house view” by capitalising on the research insights provided by our in-house equity, fund and fixed interest specialists”
Commercial benefits
“While a traditional MPS is active, a manager’s ability to implement swift, decisive portfolio change is often limited”
t Quilter Cheviot, we have modified the ‘traditional’ MPS approach to portfolio construction through the creation of “Building Blocks” — a range of funds, specially designed to provide specific geographic or asset class exposure by investing in a combination of direct equities, bonds or external fund holdings.
A
We believe our approach offers several advantages over traditional MPS and OEICs, particularly in the areas of active management, costs and reporting.
All these investment options were created to offer access to active management, providing potential advantages in terms of returns, risk management and flexibility compared to passive options. While a traditional MPS is active, a manager’s ability to implement swift, decisive portfolio change is often limited.
MPS portfolios are typically constructed through a blend of externally managed funds, comprising active and passive holdings. As external funds tend to be more expensive than direct equities or bonds, cost targets force many managers to adopt a hybrid/passive approach. This can lead to settling for broad, or partial, approximations rather than specifically selecting the desired exposure. While OEICs typically avoid a hybrid/passive approach, as they generally focus on a sector, theme or asset class, investors may end up holding multiple funds to gain diversification, leading to a less precise approach to positioning for their desired exposure.
Portfolio changes for traditional MPS can also be hindered due to a desire from the provider to increase operational efficiency. Many providers rebalance portfolios on a quarterly basis, particularly if they run multiple “bespoke MPS” mandates. This also can lead to trade prioritisation issues, whereby some MPS offerings receive preferential treatment in executing trades.
We believe our ‘Building Blocks’ offer the most active proposition in the MPS space. Our strategies are constructed solely from these eight purpose-built funds, allowing us to select individual securities and fine tune holdings to our desired exposure. As both the MPS model manager and underlying manager to these funds changes to underlying holdings can be implemented at the fund level in a dynamic manner, typically on the same day as the decision, and are immediately reflected across all holders. This means we are proactive, dynamically reflecting our “house view” by capitalising on the research insights provided by our in-house equity, fund and fixed interest specialists.
Active management
Price is one of the most important considerations for investors. All these offerings are designed to be more cost-efficient than discretionary fund management, where portfolios are tailored to an investor’s specific circumstances and objectives. Our approach at Quilter Cheviot allows us direct access to equities and bonds, cutting out an additional layer(s) of cost.
For a traditional MPS an investor is liable for Capital Gains Tax (CGT) when any underlying investments are sold for a profit. For OEICs, no CGT is payable until the investor exits their position in the fund and dividend income is sheltered by the dividend tax allowance of £1000. However, this does mean that crystallisation events are postponed, which may appear preferable in the near term but could be detrimental in the long term. If CGT rates were increased in the future then it may be deemed preferable to avoid storing up returns.
At Quilter Cheviot, our “Building Blocks” approach is subject to the same tax treatment as a traditional MPS, however our portfolio turnover has been significantly reduced as most active management decisions occur with one of the blocks. Our approach is tax agnostic, but reduced turnover at the fund level can mean lower CGT for clients.
Costs
Transparency is a key consideration for investors. Traditional MPS’ typically communicate holdings at the fund level, leaving investors in the dark about specific holdings. Similarly, OEICs tend to provide limited information on holdings, meaning it is difficult to see changes in the portfolio.
Reporting
Marketing Communication. This document is intended for professional clients. The decision to invest in the promoted fund should take into account all its characteristics or objectives as described in its prospectus. This material may not be reproduced, in whole or in part, without prior authorisation from the Management Company. This material does not constitute a subscription offer, nor does it constitute investment advice. This material is not intended to provide, and should not be relied on for, accounting, legal or tax advice. This material has been provided to you for informational purposes only and may not be relied upon by you in evaluating the merits of investing in any securities or interests referred to herein or for any other purposes. The information contained in this material may be partial information and may be modified without prior notice. They are expressed as of the date of writing and are derived from proprietary and non-proprietary sources deemed by Carmignac to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. This document was prepared by Carmignac Gestion, Carmignac Gestion Luxembourg or Carmignac UK Ltd and is being distributed in the UK by Carmignac Gestion Luxembourg. The Discretionary Fund Manager of the model portfolio is RSMR Portfolio Services Limited, a limited company registered in England and Wales under Company number 07137872. Registered office at Number 20, Ryefield Business Park, Belton Road, Silsden BD20 0EE. RSMR Portfolio Services Limited is authorised and regulated by the Financial Conduct Authority under number 788854. © RSMR 2021. RSMR is a registered Trademark. Carmignac Gestion Luxembourg is the asset allocation adviser of RSMR for the construction of the model portfolio and does not have investment discretion over, or place trade orders for, any portfolio or account derived from this information. Investing involves risk. Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise, is not guaranteed and your clients may get back less than they invest. The market value of, and the income derived from, the model portfolio may fluctuate in accordance with the values of the investments held by the portfolio, exchange rates between sterling and the currencies in which underlying investments are denominated, and other market conditions. Costs and charges are detailed in the most recent factsheet for each Model Portfolio. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. We cannot guarantee risk ratings will remain static. The model portfolio is mapped against a selection of third-party risk profiling tools to assist advisers as part of suitability assessments for clients. Such tools are however only one aspect of an adviser’s suitability process and other such as the clients’ investment term/horizon and knowledge and experience should also be considered.
Quilter Cheviot offers seven actively managed, multi-asset strategies using their pioneering "Building Blocks" approach. For more information visit our website.
Investment Manager Simon Doherty discusses why a "Building Blocks" approach offers clients greater exposure to a wide range of investment opportunities compared to traditional MPS.
t Quilter Cheviot, we have modified the ‘traditional’ MPS approach to portfolio construction through the creation of “Building Blocks” — a range of funds,
specially designed to provide specific geographic or asset class exposure by investing in a combination of direct equities, bonds or external fund holdings.
“There is little cost benefit to us in using passives and we only consider using them judiciously, typically as a temporary home for flows or a targeted exposure to a specific index”
“We can target specific exposures without blending disparate investment strategies, such as a ‘deep value’ fund with a ‘growth-orientated’ manager”
Our Managed Portfolio Service (MPS) is constructed using “Building Blocks” – a range of funds designed and actively managed by Quilter Cheviot for exclusive use in our MPS. Each Building Block provides specific geographic or asset class exposure, and invests in a combination of direct equities, bonds, or external fund holdings.
Compared to a ‘traditional’ MPS, this approach provides key benefits for advisers and clients:
Greater flexibility, lower cost: complete freedom to base investment decisions on quality, rather than cost. Prioritises agility and precision: we reflect our “house view” in a responsive manner, capitalising on the research provided by our in-house equity, fund, and fixed interest specialists. Ensures consistency: the structure simplifies the operational aspect of adjusting holdings whether in custody or across platforms. Minimal time out the market: changes to security selection are made at the underlying fund level when required. Encourages diversification: helping to avoid overconcentration to one sector or geography.
• • • • •
Responsiveness: Investment timing can be critical. The more time out of the market, the more difficult it is to take advantage of opportunities. Same day adjustments to investment holdings ensure investment timing and positioning are not compromised due to operational bandwidth. Consistency without restriction: MPS providers may be forced to make fund substitutions if boutique fund managers or certain share classes are not available on certain platforms, so you and your client may gain a different market exposure than expected. Active management level: A truly active structure can improve flexibility, returns, and risk management, but can be overlooked for a more passive or hybrid approach to bring down costs.
• • •
What is the Building Blocks approach? What does it offer and how can it benefit advisers?
There is clearly a greater risk of unwanted high levels of concentration in a passive MPS, as it simply reflects the underlying market which has become increasingly concentrated. The stellar recent performance of the “Mag 7” stocks means they have an approximate weighting of around 25% in US benchmarks and account for roughly one sixth of global indices. High levels of concentration are not necessarily detrimental if desired, but many investors are not aware that they are gaining this level of exposure through passives.
Our Building Blocks approach mitigates this risk, allowing us to position ourselves precisely for our desired exposure. We can target specific exposures without blending disparate investment strategies, such as a ‘deep value’ fund with a ‘growth-orientated’ manager.
This allows our MPS managers greater flexibility in implementing their optimal exposures, guided by a house view developed by our investment committees and well-resourced research team. We believe this leads to more favourable risk-adjusted outcomes.
Is there a risk of higher concentration of certain stocks/sectors (tech, Mag 7) in a passive MPS? How do you mitigate this?
Our Building Blocks structure allows us to access both equities and bonds directly, significantly lowering costs. This means there is little cost benefit to us in using passives and we only consider using them judiciously, typically as a temporary home for flows or a targeted exposure to a specific index.
Traditional MPS solutions typically use passives to bring total costs down. This is a result of a back to front approach, whereby providers begin with a fee level they do not wish exceed to remain competitive in the market. Then they work back calculating what level of passive holdings they are required to hold alongside the more expensive third-party funds to not go above this level. It’s a case of the tail wagging the dog- as active management is sacrificed for cost benefits. Our approach does not require this trade off.
How do your strategies align the cost benefits of passives to the need for active management to avoid aspects like concentration, sector risk etc...
Advisers should expect their provider to deliver the best outcomes for their clients. We believe that to do this, three key things to look for are:
Active management: a key attraction of an MPS, offering several potential advantages in terms of flexibility, returns and risk management. As a cornerstone of the service, a dynamic and responsive investment process, with minimal hinderance from costs, should be expected. Unfortunately, not all MPS providers deliver this.
Consistency: is another important part of service. Costs incurred by clients and the performance they receive should be the same across all platforms.
Reporting: client understanding of the services provided is key. We provide detailed read-through reports for advisers and clients, showing the top holdings in each Building Block and what is driving the performance of their portfolio. This provides far more granular detail than just showing exposure at the fund level.
What services or support should advisers expect from their provider?
Our MPS team oversees the management of both the Building Blocks and the running of the seven strategies. It is led by Investment Manager Simon Doherty and me, who oversaw the transition from ‘traditional’ MPS to the Building Block structure used today.
As members of the firm’s investment funds committee they play an active role in shaping fund selection, while I also sit on the investment committees for fixed interest, direct stocks and alternatives.
These committees work alongside our in-house investment teams to identify the most attractive investment opportunities across different asset classes. The 22-strong team of equity, fixed interest and collective (fund) analysts has direct access to the management of listed companies and to managers of funds we invest in. We conduct 40,000+ hours of research every single year!
We believe this approach is fundamental to our long-term success, meaning you can be confident that investments selected are fully researched and have been subject to thorough due diligence.
Tell us about the team’s experience and strengths.
Building a strategy block by block
Antony Webb, Head of MPS Investment Funds explains how the "Building Blocks" strategy targets specific areas to give investors exposure through a mix of equities, bonds, and external funds to benefits advisers and their clients.
For advisors looking beyond cost, there are several key considerations when choosing an MPS:
For advisors looking beyond cost, what else should they consider when choosing an MPS?
Antony Webb
Justine Randall, Chief Commercial Officer
“We know that the work advisers do safeguards futures, and can make dreams happen, which can be incredibly rewarding and demonstrates the care advisers take over their clients”
With schools offering limited careers advice and insufficient awareness amongst young people of the vast array of career opportunities of offer in financial services, we know that the work advisers do safeguards futures, and can make dreams happen, which can be incredibly rewarding and demonstrates the care advisers take over their clients. This should never be underestimated and it’s great to see the value of advice has never been higher. It’s my belief we must do more to create awareness of the breadth and depth of roles, and the terrific scope for careers.
Supply of advice talent is in stalemate – the number of regulated planners in the UK landscape has been relatively static at around 30,000 for many years now, representing around 14,000 advice firms and serving the needs of over 3,000,000 individual clients .
know that I didn’t leave school planning a shiny career in financial services as a young adviser, and I imagine this is the case for most who have been lucky enough to find their way into the industry. For financial advice, that’s where the problem, and also the opportunity begins. Quite simply there are not enough financial advisers to go around. Demand for high quality advice has never been higher and advisers are a highly valuable, scarce resource.
As advisers know only too well, client engagement is rising due to many external factors. The expansion of workplace pensions, increased access to investor information, direct to consumer marketing by large life companies, and of course, economic uncertainty. Clients are talking about money more, and need to know where to turn for help, regardless of their position on the client lifecycle. At Tatton we see the increase every day and are dedicated to helping advisers meet this demand.
There’s opportunity to serve clients at every point in their journey, and this is where some of the life long friendships built around genuine trust are built. Many IFA’s have seen their clients through good times and bad, from early mortgages and house purchases through marriage, children, middle and into retirement.
Our clients age as we do, and we need to ensure there are enough young planners coming through to help the next generation as our guardians have helped us. In the past the new planners would have come through life company and bank assurer training programmes. Many of us, including myself, having benefited from years of in-house coaching and training, exam preparation and testing from my employer over many years.
Such schemes are hard to find now with many traditional suppliers having left the market and few funded schemes now remain we need to re-think the landscape and bring it back into focus to raise awareness for the next generation.
“Advice firms are also seeing strong valuations creating a healthy market for buying and selling with many firms considering their options to merge with others, bring in new talent or even capitalise on a life’s work and exit with a hard earned payday”
This combination of factors is driving up the demand for advice and is leading to further pressure on the supply chain and ultimately delivering a reward for planners – fee models that are robust and opportunities to expand and grow advice businesses to serve more clients.
Advice firms are also seeing strong valuations creating a healthy market for buying and selling with many firms considering their options to merge with others, bring in new talent or even capitalise on a life’s work and exit with a hard earned payday. The combination of robust fee models, scope to grow and repeatable income streams is driving up multiples and encouraging buyers from PE houses to aggregators and consolidators to make regular approaches to advice firms seeking control over the clients and asset base.
Having my time again I would strongly recommend to my younger self I stuck with financial planning. As a young entrant it was tough, but if my crystal ball had been working, I would have understood the tremendous opportunities ahead to build longstanding, deep friendships with clients and be a trusted partner for decades to come - whilst making a good living. Financial services is one of the best kept secrets out there when it comes to opportunity and I’m passionate about encouraging new talent and doing my bit to celebrate what we do – after all, if we love what we do, then we never work another day again!
I
1. Source: PIMFA 2022
Justine Randall, Chief Commercial Officer at Tatton Investment Management, says that the demand for quality financial advice has never been higher and that there are tremendous opportunities ahead for young financial advisers to be a trusted partner for decades to come.
know that I didn’t leave school planning a shiny career in financial services as a young adviser, and I imagine this is the case for most who have been lucky enough to find their way into the
industry. For financial advice, that’s where the problem, and also the opportunity begins. Quite simply there are not enough financial advisers to go around. Demand for high quality advice has never been higher and advisers are a highly valuable, scarce resource.
“We work exceptionally hard to improve all areas of our business to keep us competitive. It may sound cheesy but if advisers say “Jump!” we say “How high”?”
“We develop products and features based on what they tell us they need, not what we think they’ll like and continually review and take into account ongoing feedback”
Tatton’s products, price and service commitment are built around what IFAs told us they wanted when we were created and we work hard to deliver and develop our offering based on their requirements for their clients today as we did back then. We think of IFAs as our business partners, not business introducers and since we can’t take private client money directly, they understand that we need them as much - as we want to think - they need us.
You have a mantra of “no-one understands the IFA better than Tatton.” How do you deliver on this understanding?
We are all now accustomed to finding the information we want almost immediately as technology continues to advance and this applies to investments as it does to the weather. Factors such as increasing regulatory burden and value chain pressure make it even more important to communicate often and to do so in a way that supports our adviser community in their work with clients. Whether markets are going well, or going through volatility, our communications need to be consistent and accessible at all times for all adviser and their clients. Our IFA portal provides real-time client and platform information for advisers and allows reporting to be personalised for each client already, but we are always looking to improve.
What are the pressures driving increasing demand from clients to advisers for information. How do you keep pace with this while delivering what advisers need?
It’s vital that IFAs know that their opinions and feedback matter to us and that we listen and act. Our last three product initiatives - Global Portfolios, Tatton Money Market portfolios and our new Tatton Passive Funds were all developed from requests from the advisers we work with. We develop products and features based on what they tell us they need, not what we think they’ll like and continually review and take into account ongoing feedback
How important is it to keep advisers informed on new products, how do you go about this?
Tatton are entirely dedicated to the IFA sector and we are proud to play our role in supporting the advisers in delivering their service to clients. What might seem to be the most ‘basic’ financial advice can be life changing. Advisers give their clients confidence and understanding about their financial future and our primary role is to ensure that we deliver consistent repeatable investment returns to help clients meet their goals. A close second is to support and communicate, sometimes relentlessly, to ensure clients are informed and reassured during good and bad markets. We treat the trust placed in us by the adviser and their clients as a privilege, and it’s our deep felt responsibility to deliver on that.
What is it that clients value in their relationships with advisers and how does Tatton help bridge that?
The MPS market is more competitive than ever before with a growing number of providers and increased choice of offering. This makes it important for Tatton to differentiate through a combination of factors including price, performance and service.
Our commitment never to compete with the adviser, offering a broad choice of investment styles which are risk profiler aligned and available across 19 platforms is key to our advantage. The fact we deliver all of this at a cost competitive price of 15bps ensures Tatton are highly visible to advisers when they are selecting an MPS solution – we believe it is a combination of these key pillars that have helped us thrive over our 11 year history.
The investment team have delivered consistent repeatable performance across the range of styles and risk profiles and we are obsessive about improving service to support our advisers in their client engagement. We don’t take our market position lightly and work exceptionally hard to improve all areas of our business to keep us competitive. It may sound cheesy but if advisers say “Jump!” we say “How high”?
What features are advisers assessing when selecting an MPS?
As the MPS market has matured in recent years, the average price for an MPS solution has reduced significantly from over 30bps a few years ago to around 19bps today. Tatton are proud that our fee of 15bps has helped make discretionary investing cheaper and accessible to more clients and we have done our bit to drive down the cost overall in the marketplace.
Keeping costs low so we can support our advisers in their service provision and bringing down the cost of investing for clients is in our DNA and key to all we do to drive efficiencies in our processes to continually improve.
How do your costs compare to the industry average?
How a collaborative approach brings adviser success
Lothar Mentel, CEO and CIO at Tatton Investment Management, discusses how building products and services based on direct advisor feedback ensures Tatton offerings align with evolving client needs.
Lothar Mentel
Lothar Mental, CEO and CIO
Investment risks The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Important information This article is for Professional Clients in the UK and is not for consumer use. Views and opinions are based on current market conditions and are subject to change. This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.
Invesco’s heritage in managing multi asset investments for our UK clients goes back over 25 years. Explore our MPS range and turn our expertise into your edge.
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Nicki Hinton-Jones, Chief Investment Officer
“It’s natural for clients to feel more comfortable investing in their home markets, in familiar companies with high street names among them, but this home bias is not relevant in today’s capital markets”
he most important factor determining the level of risk and return in a multi-asset portfolio is the overall split between equity and fixed income. This asset allocation decision rightly sits with the financial adviser, not the MPS, as it’s the key driver of portfolio risk and return outcomes and must be aligned with the individual client’s needs. As portfolio managers, we must decide how to allocate within those broad asset classes.
Within equities, there has been an historic tendency to allocate predominantly to the UK, with a smaller allocation to international markets. This evidences itself in the number of UK only equity funds available alongside the plethora of “world ex UK” or “international” funds. The UK is not alone in this. In my past life as a global equity manager, I looked after global ex Japan, ex US and ex Switzerland portfolios, to name a few, that sat alongside larger home-market portfolios to be used by clients depending on their domicile.
It’s natural for clients to feel more comfortable investing in their home markets, in familiar companies with high street names among them, but this home bias is not relevant in today’s capital markets. Globalisation means that companies have economic exposure that reaches much further than their domicile.
Country of listing is not country of exposure
We should also bear in mind that what we are talking about here is largely country of listing. When a company decides to come to the markets to raise funding via an Initial Public Offering (IPO), it has a choice where to list its shares and there are real-world consequences of the exchange that it selects. That choice is influenced by the listing requirements of alternative exchanges. Most exchanges allow foreign issuers, so domicile or country of business is not a limiting factor.
Not all options are equal, requirements and costs vary from one exchange to the other. China’s Alibaba, famously chose to list in the US, rather than the traditional route of listing in Hong Kong (HKSE). At the time, the New York Stock Exchange allowed weighted voting rights via different share classes, often preferred by founders who want to retain a larger share of voting control. HKSE subsequently revised its requirements.
Exchanges must remain competitive in the lucrative IPO market. In 2021, the FCA approved changes to LSE rules to facilitate getting to market at an earlier stage of development. This included rules surrounding dual class structures, a reduction in free float requirement and an increase in the minimum market capitalisation requirement . It’s clear country of listing is not purely a reflection of a company’s financial prospects or business profile.
A company’s country of listing or incorporation does not reflect the markets driving the company’s performance. Owning predominantly US, or UK, stocks does not mean that investor outcomes will be determined predominantly by the US, or UK, economy.
The largest 10 stocks in the global index all happen to be listed and incorporated in the US, but on average only 50% of their revenue is made in that market. They could be listed anywhere. The top ten holdings of the broad UK index make close to a third of their revenue from North America. London Stock Exchange (LSE) puts revenues from outside the UK for the FTSE 100 index overall at over 70% .
Any comfort that UK investors might achieve from investing in the “UK” is an illusion; the performance of these companies is dependent on global drivers.
Real differences of listing location
Of course, listing location has very real consequences for an investment’s currency exposure. A UK investor buying US stocks carries the risk of the exchange rate movements of sterling against the dollar as well as the risk of the underlying equity. Short term fluctuations in exchange rates can dwarf what’s going on in the actual investments.
Companies with exposure overseas take measures to mitigate the impact of exchange rate fluctuations on performance. Stock markets punish short term disappointments in reported earnings, so companies have their own hedging strategies in place to prevent exchange rate movements causing such shortfalls. The likes of BP and Shell have complex hedging strategies in place to mitigate the impact of dollar movements on their revenues. Market participants take currency exposures into account, research analysts have poured over the company accounts, and this is priced into valuations.
1. FTSE 100 Stocks Listed in London available at www.lseg.comondon.
2. humancapital.aon.com.
A word on currency
Domicile is no longer a useful way to look at equity markets and “home” market allocations are irrelevant. Aggregate forward-looking expectations are reflected in market capitalisation. Given the level of transparency over company activities, global market players allocate capital to the areas of opportunity that offer the best returns and asset allocation driven by home market bias should be a thing of the past.
So does domicile matter?
Nicki Hinton-Jones, Chief Investment Officer at Timeline, says asset allocation driven by home market bias should be a thing of the past and investors should allocate capital to the areas of opportunity that offer the best returns.
he most important factor determining the level of risk and return in a multi-asset portfolio is the overall split between equity and fixed income. This asset
allocation decision rightly sits with the financial adviser, not the MPS, as it’s the key driver of portfolio risk and return outcomes and must be aligned with the individual client’s needs. As portfolio managers, we must decide how to allocate within those broad asset classes.
Cheshta Dhingra, Graduate Investment Analyst
“Empirical evidence serves as our lighthouse guiding this ship’s navigation system's decisions. It provides historical data on past voyages, including the effectiveness of different navigation strategies in similar conditions”
Georgios Bouzianis, Senior Quantitative Analyst
“While annual rebalancing might seem like the prudent choice, comparing different scenarios has shown they don’t give the best results. It's a bit like celebrating your birthday every day—it loses its magic after a while”
Comfort zones
Discomfort Too much risk
Risk tolerance score
Plus/Minus >20%
Plus/Minus >11 – 20%
OK Risk
20
10
0
30
40
50
60
70
80
90
100
% Growth assets
Discomfort Too little risk
magine your investment portfolio as a ship navigating through changing tides and currents in the sea. Your goal is to reach a distant island representing your financial objectives. However, the sea is unpredictable, with waves and winds pushing the ship off course from time to time. At Timeline, we know the secret to staying afloat; our tolerance-based approach to rebalancing acts as a sophisticated navigation system onboard the ship.
Rebalancing is a critical strategy in the realm of investment management which involves periodically readjusting the allocation of assets within an investment portfolio to ensure that it remains aligned with the investor's objectives and risk tolerance. This entails selling assets that have appreciated significantly and reallocating the proceeds into underperforming or undervalued assets, thus restoring the portfolio's desired asset allocation. By adhering to a systematic rebalancing strategy, investors can navigate market volatility more effectively and strive for long-term financial success.
The concept of rebalancing can also be approached differently and while annual rebalancing might seem like the prudent choice, comparing different scenarios has shown it doesn’t give the best results. It's a bit like celebrating your birthday every day—it loses its magic after a while. Enter the 10% drift strategy - instead of waiting for the Earth to complete another lap around the sun, we only shake up the portfolio if it strays more than 10% from its original mix.
Why 10%, you ask? True to our form, we back this up with evidence. Below, you'll find a chart courtesy of FinaMetrica, renowned for its expertise in risk profiling. This chart illustrates how risk tolerance correlates with the proportion of growth assets in the portfolio. According to their findings, a deviation of 10% in growth assets is generally deemed psychologically comfortable. To put it simply, if a client opts for a 70% equity portfolio, a range of 65% to 75% in equity holdings fits like a glove. Nevertheless, anything between 60% to 80% is deemed acceptable, offering a flexible yet sensible approach to portfolio management.
Let's delve into the merits of tolerance-based rebalancing through three distinct lenses. First up, Risk Management; picture this as your portfolio's personal bodyguard, keeping things in check. Instead of rigidly sticking to a fixed allocation, tolerance-based rebalancing lets your investments dance within a range that matches your risk tolerance. It's like having a security system that adapts to your comfort zone, ensuring your financial peace of mind.
Now, onto Performance. Sure, the annual returns might not make headlines, but over a 30-year retirement party, they add up big time. We're talking about an extra 2% to 8% return compared to the standard annual rebalancing routine. Rather than top-slicing outperforming assets periodically, tracking drift allows momentum to play its part, only trading when it’s necessary to maintain risk targets. Simply put, getting bonus growth for sticking to your rebalancing strategy.
Lastly, let's examine Frequency and Efficiency. This aspect operates akin to a well-oiled machine for your portfolio. Employing the 10% tolerance approach means you're not inundated with continuous rebalancing. Instead, adjustments are made judiciously, less frequently than annual occurrences. This results in reduced trading activity, streamlined processes, and minimised portfolio frictions. Essentially, it's a strategic manoeuvre, ensuring your financial health with precision and finesse.
In the practical application of our strategies at Timeline, we harness the power of technology to effortlessly track portfolio drift. Our online Control Centre is the backbone of this process, meticulously monitoring deviations in asset classes and individual holdings. This ensures that we maintain an unwavering focus on aligning portfolios with our client's investment objectives. Additionally, managing portfolios on an advisory basis often entails navigating the complexities of obtaining client authorisation for annual rebalancing, let alone tolerance-based adjustments.
However, Timeline's discretionary permission offers a streamlined solution, circumventing paperwork hassles and client consent requirements. This approach enables us to swiftly implement necessary rebalancing actions, ensuring efficient portfolio management while minimising administrative burdens. By leveraging advanced technology and a discretionary approach, we navigate the complexities of rebalancing with ease, ensuring that our clients' portfolios remain aligned with their goals.
Backing rebalancing with evidence
Empirical evidence serves as our lighthouse guiding this ship’s navigation system's decisions. It provides historical data on past voyages, including the effectiveness of different navigation strategies in similar conditions. For those interested in delving deeper into our research on the 10% drift tolerance rebalancing strategy, we invite you to contact us to find out more and explore our in-depth paper. By analysing this evidence, the navigation system can fine-tune its responses to current challenges, maximising the ship's chances of reaching the island safely and efficiently.
Timeline's Georgios Bouzianis, Senior Quantitative Analyst and Cheshta Dhingra, Graduate Investment Analyst, on navigating financial waters with rebalancing and tolerance-based buoyancy.
magine your investment portfolio as a ship navigating through changing tides and currents in the sea. Your goal is to reach a distant island representing your financial
objectives. However, the sea is unpredictable, with waves and winds pushing the ship off course from time to time. At Timeline, we know the secret to staying afloat; our tolerance-based approach to rebalancing acts as a sophisticated navigation system onboard the ship.
