Nowadays, the majority of advisers accept they need specialist investment knowledge from those in the know. But it is easy to forget how quickly this change has come about.
As recently as the start of the millennium, life company bonds were the biggest selling product in adviser land. The major task for an adviser was getting the numbers for the annual valuation.
Not only did platforms do away with the need for such products, they also provided online trading and immediate valuations. Platforms drove the change from life company bonds to a portfolio of funds.
Regulation drove the next big change: the retail distribution review (RDR) banned commission and made fees compulsory. The remuneration model changed from 7%-7.5% first and final to 3% plus 0.5%: the new model, which gave this magazine its title.
In the background, regulation was creating a more professional adviser, one who created a balanced portfolio of funds to suit the client. This replaced the flavour of the month choice that was the common recommendation in the previous world.
The RDR resulted in the centralised investment proposition, as advice had to be consistent across an adviser business. For the vast majority, this meant the use of model portfolios.
I was chatting to an award-winning adviser recently. He suggested many advisers who brag they have outperformed might struggle to provide data to support their case. I agree. But the more advisers employ models, the more data around net performance will become available.
It was around 2006 when leading adviser Paula Steele, managing partner of John Lamb, told me she was no longer convinced she could demonstrate to clients she was competent to run money. This was a shock to me at the time, especially coming from the estimable Steele.
She was ahead of her time. Now, it seems only a small minority of advisers conduct asset allocation and fund selection themselves. It is either carried out by experts in the firms, or outsourced in whole or in part.
Outside investment knowledge may be in the form of data publishers such as FE Analytics or Morningstar. Advisers may just use fund ratings to build their own portfolios. They may use data providers for models, or they may use their discretionary funds.
When Morningstar Investment Management Europe launched discretionary funds at 0.3% for active and 0.2% for passive, it shook the traditional discretionary fund manager (DFM) market.
Many top firms have specialist consultants such as Albemarle Street Partners, Albion and Cormorant. Others use platforms such as Quilter (formerly Old Mutual Wealth), Standard Life, or asset managers such as Dimensional or Vanguard.
Arguably, the most controversial option is discretionary managers. You only have to look at the comment sections under any article on discretionary managers to see just how marmite they are. Although an increasing number of advisers are employing the model portfolios of Tatton, Brooks Macdonald or Brewin Dolphin, others accuse them of being expensive and adding no value.
Many also accuse discretionary managers of lacking transparency. I confess, when I have viewed the websites of numerous leading discretionary or wealth managers, I have (euphemistically) struggled to identify the total cost.
Cost is a clear focus for the future. Investment is about risk-adjusted return and all costs diminish this. Forecasting outperformance based on history is hard. The biggest stars can fall dramatically.
It is worth remembering Vanguard’s Personal Advisory Service, only available in the US, comes in at about 0.34% – including investment management, platform and advice. That’s a rounding error in the UK!
Then there is the method of charging i.e. basis points. Typically, if I introduce £100,000 to a DFM, the rate is the same as it would be for £1 million, or £5 million. There is a good argument that models are just a bit of intellectual property (IP). Why not pay a fixed fee for such a bit of IP?
Current players do not have to like it, and do not have to play ball. However, they cannot stop new credible players entering the market. With the growing emphasis on cost and transparency, this does not seem too fanciful to me.
Clive Waller is managing director at CWC Research.