How can advisers create an efficient investment planning process at scale, while still making sure they are catering to each of their client’s needs?
Fund managers will often talk up how consistent or repeatable their investment selection process is. They have a robust strategy and they stick with it, applying the same winning methodology and research process every time they pick a new asset class or geography.
Diverging from this would leave too much to chance, the argument goes, and the best managers do not just make top picks based on how they feel on a particular day.
Advisers picking investments for their clients face interesting questions when looking at similar calls, given the needs of each financial plan and the circumstances that prospects arrive at their door with can be wildly different.
Should advisers be deciding on which investments are suitable in exactly the same way for each of their varying clients?
More importantly, does an investment plan that is suitable for a client necessarily have to be “tailor-made” with their exact circumstances in mind?
Thesis Asset Management director Lawrence Cook does not believe so. He says: “Personalising delivery for the sake of it makes no sense unless you enjoy creating work for yourself.
“Let’s use a top-end restaurant as an example. If I go to a Michel Roux Jr Michelin-starred restaurant, I expect to get a personal service and I expect top-quality food, delivered as described. I am prepared to pay for that service.
“However, I do not expect a different menu and the chef starting from scratch. On the contrary, in a top restaurant the menu is shorter but delivered to a high and consistent standard time after time.
“To do that, the restaurant focuses on the process of service delivery and being able to do so repeatedly at an excellent level of quality.
“Clients with similar needs ought to get similar outcomes. It is very difficult to do that if one selects different investment solutions for the same requirement.”
Starting at the beginning
Regardless of the process followed, for advisers to successfully decide on what the right solution for a client is, identifying their investment needs is key.
How should advisers go about this? The FCA’s guidance on choosing investment routes for clients says that this should start with the client outcome in mind – that is, deciding what it is they want to get out of their money in the first place.
Do they want their investment to provide them with income for retirement? Do they wish to withdraw the majority of their funds over a short period of time?
Or are they keen to invest for the long run, but still want to occasionally dip into their pot?
Advisers may be able to, broadly speaking at least, divide their client bank based on how individuals want to use the gains from their investments into these three groups.
But when taken with the client’s subjective needs or objectives on what they want to do with their money, advisers also need to find out where they fit with regards risk.
According to Shoe Capital Financial Planning director Ben Yearsley, risk is what the client segmentation process should really come down to. Yearsley says: “Risk questionnaires are an important part of the process and ensuring that the subsequent portfolios fit in with the results.”
In this stage of proceedings, advisers have a range of third-party services at their disposal, which can bring a great deal of centralisation, consistency and repeatability to the process.
Dynamic Planner head of proposition Chris Jones says using a risk-profiling tool can both speed up this stage of the process for advisers and bring an element of objectivity to it across disparate clients.
When former regulator the FSA looked at the risk-profiling practices of financial advisers all the way back in 2011, the watchdog warned about the danger of questionnaires leading to miscategorising clients. To avoid this, results of computational risk-profiling should be complemented with a face-to-face discussion between the adviser and the client.
This can ensure the human elements and intricacies of each individual client’s investment needs are still accounted for, while certain benchmarks for consistency remain.
Jones says: “If all the people who fill in the questionnaire then have a conversation with the adviser, it is better, because it gives them context. The adviser can use analogies, stories, their experience and so on to bring those numbers to life. But there is no point wasting their time doing those numbers at the start.”
Identifying the client’s risk profile is then followed by matching them with relevant investment solutions.
Putting clients in the right boxes
Yearsley, whose firm conducts its investment processes in-house, recommends advisers set up a set of core model portfolios based around risk profiles.
He says: “The core model portfolios can then be tailored to individual client needs, but it’s having the common basis from which to start that helps efficiency.”
When it comes to having a range of solutions, Yearsley warns against using too wide a set of portfolios for clients which unnecessarily complicate the analysis.
He adds: “I always think it’s dangerous ‘pigeon-holing’ too much, but how many different risk profiles do you actually need?
“Arguably, five is probably as good a number as any, with a couple of more cautious portfolios, a balanced one, then a couple of higher-risk ones. Any more than that and the nuances are too small to be relevant, in my view.”
In the case of advisers who choose to leave the model portfolio construction and management to third parties, Defaqto investment analyst Fraser Donaldson sees two distinct approaches to how they select solutions for their clients.
First, he says advisers tend to select a range of portfolios to choose from one discretionary fund management firm, which are most likely managed by the same person and have different risk portfolios, and they select the right one for the client.
In the other – less frequent – strategy, advisers mix and match portfolios from different DFMs.
According to Cook, using multiple DFMs makes sense only in cases where the adviser needs to select bespoke solutions from across the market, otherwise “this can end up rather like an old panel for retail investment products”.
Cook believes it is feasible to design a service with a DFM to deliver on a broad client segment requirement.
He says: “With clients requiring a regular income, you would expect the DFM to deliver a service that is tailored specifically to those client outcomes. In this situation, using one DFM can work very well and ensures clients get a consistent service.
“It is certainly doable for a DFM to have tailored approaches to meet the IFA client proposition requirements. This is unlikely to be met by an off-the-shelf solution.
“You would need to partner with a DFM that is prepared to roll their sleeves up to build something for the IFA.”