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Profile: 'Growing pains' - inside a boutique profit battle

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Profile: 'Growing pains' - inside a boutique profit battle

South London-based Fowler Drew has moved back into the black after spending a couple of years in the red as it invested heavily in the business.

The wealth and financial planning boutique, which was set up back in 2002, has near-doubled its staff headcount and moved to upgrade its IT systems over the past three years.

Fowler Drew takes a quant-based approach to investment management, with the aim of bringing an institutional-style liability driven investment (LDI) style to private client wealth management.

Chris Ling, Fowler Drew’s head of investment management, says the systems powering its investment process are being improved, with the company outsourcing to software provider Matlab for its LDI modelling. It is also enhancing its broader back office and online platform.

‘The computer modelling we had been using to run client portfolios hitherto had been Excel-based. We have moved onto using Matlab for our quantitative modelling and now we are linking Matlab to the front-end, so we have something much more interactive and visually usable to work with clients in the adviser meetings,’ he says.

The company has also bolstered its investment team, with the recruitment of four more staff, taking the total up to 10.

‘We have been hiring quantitative scientists, so people with PhDs in mathematics to help us with our modelling, and that was a key increase in our costs.’

The company, which has now reached £300 million in assets under management (AUM), also took the opportunity to reward its existing staff.

‘With the company becoming more successful, we have also increased wages for the staff generally, probably more than the average company. Three or four years ago, we probably weren’t able to pay
as high a salary as many companies in the industry, but that’s definitely caught up at least in the last couple of years.’

The investment came at a cost, with the company moving from generating a £105,000 profit to a £20,000 loss over the 12 months to the end of March 2016, as costs rose 47% to £447,000.

After narrowing losses to £1,000 in the 12 months to March 2017, its last accounts for 2018 showed that it moved back into the black, generating a pre-tax profit of £55,000 on a turnover of £688,000, up 13%.

‘Those increases in costs are like growing pains,’ Ling says.

‘Top line revenue has increased a bit over three years. Growth hasn’t been hugely exciting year-on-year, but it has been steady.’

He admits that the company’s approach means the firm is not for everyone, with the LDI modelling investment process different from the risk-rated investment focus adopted by most in the industry.

Many IFAs, he believes, are too comfortable just using model portfolios, shoehorning clients into different risk buckets, rather than taking a tailored approach.

The modelling is key to Fowler Drew’s investment proposition, which was built by the firm’s founder, Stuart Fowler, a former Wealth Manager cover star. He spent much of his career running giant pension schemes for the likes of BBC and Ford.

 ‘Our portfolios are fully goal-driven. On the institutional side, it is more commonly known as liability driven investment, and we are using a very similar approach to what they do in pension funds, but we do it for individuals and families,’ Ling says.

The Fowler Drew approach uses a form of portfolio separation theory, meaning the client’s short-term cash flow needs are met by holdings in cash and index-linked gilts, which also offer an inflation-proofing element. The client’s longer term horizons are then designed to be met by the rest of the portfolio, which is invested in globally diversified equities.

‘This gives us a short and the long end of the portfolio and that sort of overall mix between the short and long gives you your overall asset allocation over time,’ he says.

He is critical of the traditional risk-based approach, which he believes is not the optimal way to meet divergent client requirements.

‘Where it is a one-box-fits-all approach, there is no nuance to the cashflow planning – it’s just whatever time horizon has been given, and clients are put into a risk-rated portfolio. They will have some sort of mix of equities, maybe cash or bonds, or even have hedge funds and property, but the focus is very much on volatility as the risk that is trying to be managed,’ Ling argues.

‘So, at the moment, we don't fit into the typical role where we can go and sell some services as a discretionary fund manager on platforms because we don't have those standard risk-rated portfolios.’

The online platform that the company is investing in will become another key driver of growth. It is designed so that pure financial planners looking to outsource discretionary management will be able to plug into it, so they can offer that additional service to their clients.

Ling says this will require the firm to work closely with IFAs, ensuring they fully understand its investment approach, so Fowler Drew can explain the modelling to them.

‘We would be partnering and working together because they will need to be in touch with us about what exactly the modelling means and the assumptions behind it,’ Ling adds.

Another key way Ling believes the company is able to differentiate its business is through offering both integrated financial planning and discretionary investment management services.

The firm’s clients are typically larger than the industry average. It has around 60 in total, with their investable assets ranging from around £500,000 to £15 million, with the average having £5 million.

Fowler Drew charges a flat fee, based on complexity, rather than being asset-based, which many other companies prefer. It typically veers between £3,500 and £25,000, moving on a sliding scale, which Ling believes offers value for money.

‘For somebody who has £10 million to invest, that is still quite a cost-effective all-in-advice and management fee. The business being flat fee and competitively priced, with a client paying an all-in fee for investment management and financial advice is an order of magnitude lower than what some firms charge.

‘[It is] what we might consider unfair and unnecessary charging by a lot of wealth managers. They probably charge on average for similar client bases three times as much as what we charge.’

Ling adds: ‘The greatest power you can harness is the investment team and the financial planning being fully synergised and integrated and that’s when you really get the most benefit for a client.

‘I don’t think that I could do it properly without knowing exactly what is going on with the client, and we deliver that through our cash flow modelling process.’ 

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