Client satisfaction with advised portfolios is about to be “tested to destruction” as centralised investment propositions (CIP) face a double whammy of market volatility and pounds-and-pence fees disclosure under Mifid II changes.
A Lang Cat report released this week detailed that 55% of advisers run advisory models as their centralised investment proposition (CIP), followed by multi-asset (49%), outsourcing to a DFM (41%) and discretionary models (8%).
But Lang Cat boss Mark Polson says none of those products have been tested in difficult markets with volatility triggered in October by the tech-led sell-off hinting at stormy weather ahead in 2019.
In October, the S&P 500 lost 6.9% in the first several weeks of the month, its lowest since September 2011.
Polson said: “We’ve built a system where people are getting put in to these risk-graded portfolios, which might be advisory, might be discretionary, might be multi-asset, but none of them have lived through a full market cycle yet – not one.
“They’ve all launched post global financial crisis because that’s when the regulation happened and that’s when you started getting in to that.”
Mifid II fees disclosure
Just as markets turn choppy, fee disclosure required under Mifid II is coming into force in Q1 2019 and will require investment providers to send clients pound-and-pence details of charges.
Polson said: “A paraplanner that we know shared with us a disclosure payment. A client had £250,000 Sipp, his total charges were 2.4% a year, which was a surprise as nobody thought it was that much. The adviser firm was taking 1%, the standard, so they took £2500 that year, there was basically no activity, no drawdown and the fund lost £12,500.
“Advisers will always say ‘my clients aren’t worried about market downturns, I’ve got them well drilled, they understand volatility is part of life and they don’t even phone me up when something bad is happening with markets or reported on BBC’.
“Well, let’s find out,” he said.
“That premise is about to be tested and it’s about tested to destruction because at the same time as markets are hitting the frets, we’ve got new stuff coming out, like ‘oh by the way, you’ve just paid x to lose money, happy with your wash?”
In-house vs outsourcing
Many advice businesses have prided themselves on financial planning but 55% still run their own models in-house, Polson says.
“If you’re outsourcing your investment, obviously there is somewhere you can go to talk about that. But if you have insourced it and you are running your own advisory models, you have nowhere else to go. So, even if you think that as a firm you’ve located your ‘mojo’ and your value in financial planning, as opposed to investment management, if you’re one of the 55% running your own models, that’s not true – you haven’t. Because the first thing clients are going to see is that model portfolio x lost you this and cost you this.”
However, he adds that those advisory firms are coming under increasing pressure with the way they work. The level of disclosure and client consent is moving to create a narrow path and effectively what it’s going to do is make it difficult to do both financial planning and investment management.
Tactical advantage
Questioned about which CIP would be most resilient in a market sell-off, Gbi2 managing director Graham Bentley told Portfolio Adviser the structure is irrelevant and it is the risk-rating that will dictate how portfolios perform.
Bentley says: “The industry is hooked on risk profiling and matching asset allocations, consequently at each risk level, their respective Risk level 5, say, will look quite similar. Advisers will mostly borrow allocations from their respective platform providers or Distribution Technology.”
Gillian Hepburn (pictured), director at Discus, argues all bar advisory models have the speed to respond a market fall or volatility.
“For example, if the manager of the portfolio, be it an adviser, DFM or asset manager decided to reduce an equity exposure or increase a cash exposure then those portfolios being managed on a discretionary basis i.e. those other than ‘advisory models’, could be updated more quickly as there is no requirement to seek and wait for permission from the client prior to making any changes to the underlying investments.
“This means that the portfolio manager can react far quicker to market conditions. This ability to respond quicker to market conditions and volatility could result in clients experiencing better performance or suffering less of a loss in downtimes.”
Likewise, explains that during periods of market turbulence, “An advised portfolio will however require the client to be contacted, a recommended course of action set out and documented and ultimately gain consent to act,” he adds. “That will clearly take time to effect, so from this perspective a DFM or multi-manager has more flexibility to take form a purely technical perspective.”
Empathy and understanding
Managers with discretionary authority over client assets and multi-managers in theory have a “major tactical advantage” by being able to act swiftly to reposition portfolios, says Tilney’s managing director Jason Hollands. “That could mean shifting into cash or other defensive assets.
However, many investors still value dialogue with their adviser and want the final say on recommended actions, he says.
Speaking to Portfolio Adviser, he explains that the conversation also becomes a change to reassure the client who may be anxious and therefore, there is still an important place in the market for advised portfolios where the adviser has the sufficient knowledge and skill.
“The relationship between and adviser and their client is of paramount importance and in my view, periods of market turbulence are a time to step up contact and to help reassure clients that their portfolios are being looked after according to the agreed objectives.
“Yes, DFMs can help with this process, providing the investment input, but the client facing adviser will always be able to bring that empathy and understanding of what this means for the client as part of their overall financial plan.”
