1. The changing regulatory and investment backdrop for advisers
2. Picking an outsourcing investment partner
3. Where the regulatory responsibility lies in the outsourcing process
Tutors on the panel are:
Mike Webb, CEO, Rathbone Unit Trust Management
Tom Caddick, Head of Global Multi-Asset Solutions, Santander Asset Management
Frank Potaczek, Head of Insight and Consulting (Fund Management), Defaqto
Nicholas Samouilhan, Fund Manager of Multi-Asset Funds, Aviva Investors
PRESENTER: In order to consider the viewing of this video as structured CPD, you must complete the reflective statement to demonstrate what you’ve learned and its relevance to you.
Hello and welcome to this Akademia roundtable on outsourcing and the benefits that investment outsourcing brings to adviser firms and their clients. On the panel we have: Mike Webb, CEO at Rathbone Unit Trust Management; Frank Potaczek, Head of Insight and Consulting at Defaqto: Nick Samouilhan, Multi-Asset Fund Manager at Aviva Investors; and Tom Caddick, Head of Global Multi-Asset Solutions at Santander Asset Management.
Mike, people talk about the regulatory landscape getting tougher, has it actually got tougher in the last few years?
MIKE WEBB: Well, yes, unquestionably it’s got a lot tougher. The advent of RDR, the suitability regime, the regulations around UCIS/NMPIs and the general standards I think that a regulator now expects are perhaps far higher than we have as a whole industry been used to for the last few years. So yes it’s definitely toughening up and I think will continue to toughen up as they start to implement more and more guidance and clarification around the strategic asset allocation models, fund selection etc.
PRESENTER: Well, Frank, would you go along with that and if so how much more tough is it likely to get over the next few years?
FRANK POTACZEK: Well I’d certainly agree that things have been sort of increasing in terms of the focus of where regulation is asking advisers to look at the suitability of their clients. The way that advisers are constructing solutions have certainly changed. They need to look underneath the bonnet a lot more, they need to actually understand the types of solutions they’re recommending, to be able to segment the clients and then use the correct solution with the correct client segment is vitally important, so that’s a new level of information, a new level of learning that some of the advisers are having to actually build into their processes.
PRESENTER: Well, let’s bring our multi-asset managers at this point. Nick Samouilhan, are you finding that in terms of the training levels that you as fund managers and the new people coming in to the firm on the investment side, do you just think goodness we need to know more now than we did five, ten years ago?
NICK SAMOUILHAN: More and I guess different things. So the investment universe expanded, there are more asset classes to cover, and within that there are more ways of accessing that. So if you want to take a very simple example of investing in the UK equity market, in the past you could buy a range of funds, now you have a range of different styles and you have a range of different ETFs, and if you go beyond that you have a range of different say option strategies on top of that. So it’s both the breadth of what you can cover and how you can deliver that that’s increased.
So, just your starting point, how you build your portfolio has fundamentally changed, on top of that there’s a whole range. The regulatory point, we as a fund management industry have had to reinvent not only how we do business but the perks we offer, because the world has changed and we need to move with that.
PRESENTER: And taking that point on, Tom Caddick, does that mean you need more resource now to run investment portfolios than you did five, ten, fifteen years ago?
TOM CADDICK: I think yes is the simple answer. I mean I think to ask has the regulatory burden got tougher over the past few years, I think you ask anyone and the answer’s yes. As a fund manager and as a fund management group, the environment has become more competitive for sure. As Nick was just saying, the landscape has become more complex. There’s more choice, there’s I think more expectation, the industry has moved and evolved. So absolutely resource is important.
PRESENTER: But are you also finding as part of that when you say, talk about resource, is that a question of saying we can have more computing power and computing power’s quite easy to get these days, or is it actually about having people with higher and higher levels of qualification?
TOM CADDICK: I think it’s a bit of both, and every group, every team will be different in terms of what they want. I mean forget computing power for a second; I mean the computer’s just a dumb terminal unless you’ve got someone to actually extract something out of it. It doesn’t matter whether you’re buying an off-the-shelf package system or whether you’re producing something yourself, you’ve still got to have the expertise to be able to extract that information. But undoubtedly I think it’s the skill and expertise within your team and then having the resources available to you to be able to extract information in an efficient way.
PRESENTER: Well, Frank, I know you’ve got software tool, so we’d better get you back in on that point.
FRANK POTACZEK: To pick up on Tom’s point. It’s not only about sort of the computing and the actual exams and the qualifications, it’s also about experience. Fund manager tenure is something that we at Defaqto look at and it’s part of our Dun ratings. Essentially what we were saying is that the fund manager needs to be able to understand what tools to use, which are the correct tools, how to actually define the landscape and therefore make the opportunities to actually create the investment mandate that’s right for the client and for their solutions.
PRESENTER: Given that it’s not exactly a brave new world, but certainly there’s quite a lot of new stuff about, do you think enough managers have got a track record that are pulling all these different knobs and levers, and do you think you’ve got enough expertise to judge whether they have?
FRANK POTACZEK: Well I certainly think that we do. We’ve got a number of grey haired individuals at Defaqto who’ve seen the various markets evolve over the sort of many number of years. And part of our process is to continue with change, to continually improve the criteria by which we judge investment groups and their funds. But certainly when you look at some of the new products that are being launched there are some younger people coming in with new fresh ideas. Well, when you’re looking at the multimanager universe, you still need an awful lot of people who have had the experience of both bull and bear markets and to be able to judge, to be able to interrogate the guys that they’re picking in terms of their funds to be able to decide what’s appropriate for them.
PRESENTER: Well I mean picking up on that have you experienced bull and bear markets, Mike Webb, when you’re looking at putting the teams together at Rathbones, how important is the experience as well as the qualifications?
MIKE WEBB: It’s very interesting, experience is extremely important, but actually having a sense of continuing to learn. It doesn’t matter how long you’ve been investing in markets, whilst history can always look similar, and to current events, actually they’re never quite the same, so that experience and an element of humbleness I think is a very important thing. What we’ve found is actually you have to find a mix of both capable young individuals and obviously now they’re incredibly well educated, but also we’ve been hiring a number of much older analysts to come and join the team, more grey hair on that team, and that really has made a very big difference we think in the last few years.
PRESENTER: And, Nick, just to pick up on that I mean at Aviva how do you lend that experience?
NICK SAMOUILHAN: Yes, the important one I took from that is the belief that it’s not about having one or two, you could have one or two very smart, very huge track record individuals who are very experienced, but they will always have a single view. And what you want to try and build up is a team approach where there’s multiple views, where there’s an open and challenged environment, and one thing we openly encourage is that there is a set of views that come up and no-one said your view is right or your view is always wrong, you have to continue to defend that. And on the team we’re quite proud of the fact that you’ve got people with very strong quantitative backgrounds, others who don’t have that have a very qualitative approach, and it’s that mix which we push quite strongly. Because we know we’re going to be wrong quite a lot of the time, you kind of want the other people to spot that before you put that onto our portfolio.
PRESENTER: Well you’ve been talking a lot about the extra resource that you’ve needed to build into your own investment propositions over the years, but there’s still a lot of advisers who do investing themselves. Tom Caddick, I mean what would you say to somebody who said well that’s all well and good but they’re sort of spending money they don’t need to, they can’t see the wood from the trees?
TOM CADDICK: Yes, I mean far be it for me to say to an adviser I haven’t met or the community at large that they shouldn’t be doing that. I mean every group, every team and company’s going to be different in their approach. But my take on that would be that really the open challenge of is that best serving your end client, not only the end client but also the business as a whole. I mean this is what we do 24/7. I know that we talk about, you know, the subject here is outsourcing, I like to think of it as partnering up with professionals, specialists in that particular field - we’re talking about investments right now - partnering up with investment specialists who focuses on this area 24/7 so that you as an adviser can focus on the more holistic needs of the client. And part of that need is to make sure you’re partnering up with the right groups, of course, but it makes sense to do it that way.
PRESENTER: And Frank, given all of this complexity, if you’re an adviser how do you go about judging I mean very simplistically put who’s good and who’s bad, because IMA sector seemed to become ever more complex and?
FRANK POTACZEK: It’s a very interesting point. I mean there’s a very subjective answer to that. A lot of people will have commonality about what is good, better, best, and it can be a very emotive subject. I think the way we go about it is because of the experience of what we’ve seen, how fund managers have tended to perform across various sort of market cycles, if you build up a layer of a qualitative and a quantitative approach, then you’re looking at the past history of the fund manager. We talked about manager tenure, but a manager can be in situ for an awful long time if they’re not producing the goods. And a fund manager has to establish a pedigree. They have to establish the idea that they have been able to perform in a particular market environments.
So when we look at what is good, it’s the qualitative and the quantitative. The quantitative is about consistency, have they performed consistently according to their mandate, have the returns that they’ve been producing risk adjusted, how much risk have they taken to actually produce the returns? We find it a very complex area to look at, so many different variables. So we look at a handful of criteria to try and whittle down the core criteria to work out what we think that the adviser we’re looking to judge what is a good fund to actually look for.
PRESENTER: And do you think there are enough options out there so that you’ve got a meaningful peer group in these areas or do you find there’s one or two you think there’s just a couple left over there?
FRANK POTACZEK: Well, I think if you look at the main IMA sectors, I mean what we do is, as many of the rating agencies do, use the IMA as a start. There are a number of areas, risk targeted being one of them, that there isn’t an IMA sector for. We felt the need that we had to create our own sort of sector by which we can judge, and if you have 10 to 15, maybe 20 groups within that sector, that’s a meaningful sector to judge. On the flipside of that, you have a number of groups who don’t want to have their funds grouped into an IMA sector, which is why we’ve seen over the past few years the expansion of the IMA unclassified sector, because they don’t feel that they’re going to be judged correctly within the current environments there. So the fund rating agencies I think have to actually lead a little bit and create sectors by which groups can be adequately judged by their peers.
PRESENTER: I’m just going to ask our fund manager representatives on the panel which of those strategies they’re going for. So Tom for Santander, are you if I say unclassified or do you like IMA sectors?
TOM CADDICK: So I mean we’ve fairly recently gone through an exercise of moving a number of our funds into the unclassified sector, for the very reasons that Frank’s just highlighted. I think when you’re looking at the multi-asset, of which multimanager is often part, in other words funds which will have a variable weightings and positions across different asset classes, your returns, if you’re looking at just returns, will often be driven by your strategic positons across those different asset classes, and they will vary. Quite often, they will be varied by the type of risk or the type of client they’re looking to be a portfolio for, and that will drive your returns, not necessarily risk-adjusted returns but your returns. And that is why so many groups and funds are being moved into the unclassified sector. Because you could judge one fund over another based purely on returns, but actually it’s got nothing to do with skill, it’s just that one’s got a higher weighting in equities at a strategic level.
PRESENTER: Okay and…
NICK SAMOUILHAN: We had the same thing, so we have five risk-targeted funds, none of which sit in the traditional peer groups, and it’s because the way we run them, they’re just not comparable to the funds that are in there. And just as a starting point for instance our funds are globally unconstrained, whereas if you look at many of the funds in that sector there’s a huge bias to UK assets. Now, when UK assets do very well, we underperform. Times I guess when the opposite’s true we do very well against them. That’s not us beating the peer group; it’s just us doing something very different. And we like going to clients and saying here’s philosophically how we approach doing this, don’t compare us to other funds in that group because we are different, we think here are some natural peers to us if you want to compare us to others. But yes, it is a breakdown if you want all of that approach finding classified things which are quite disparate in how they approach managing money.
PRESENTER: Okay, and Mike, what was the strategy at Rathbones?
MIKE WEBB: Yes, we’re outcome orientated, so risk-targeted funds. We’re all in the unclassified sectors for exactly the same reasons as my colleagues here have explained. I would like to see the IMA starting to look forward and seeing whether we can group funds which are risk targeted and outcome orientated. Not because I want to see performance comparisons, because again that is not appropriate for these type of funds necessarily, but more because it would allow financial advisers to go to a specific area to see who populates that universe in an easier fashion you can at the moment. Right now we’ve got unclassified funds, we’ve got absolute return funds, we’ve got funds in the traditional mixed asset sectors that are run this way, and none of them are comparable. You know, they’re not easy to find. So I really would like to see some movement on this.
PRESENTER: Given, Frank, that people’s attitude to risk changes over time, and also sometimes depending on how they’re feeling within quite short spaces of time, if you’re an adviser thinking about outsourcing, what are you looking for from an outsourced partner? Is it a fund, is it a suite of funds, what…?
FRANK POTACZEK: Well again it really depends. I mean again our engaged software is used by a number of IFAs, and what we find that there is a difference of approach by many people. I think for the vast majority of advisers nowadays they’re looking at quantifying the way they actually go about identifying risk, the acceptance of risk. They’re looking to actually have a common language with their clients. So when they look to define how much risk a client is willing to take in terms of meeting their outcomes, there’s an awful lot of attitude to risk questionnaires out there, psychometric sort of questionnaires, that people don’t blindly follow but use to determine what the natural risk of a client is. So, for example, if a client comes out on a scale of one to ten, let’s say a three at the lower end of risk acceptance, but their outcome is to achieve a higher return, they can’t adopt a level three type risk for the returns that they actually want and need to go up the risk scale let’s say a five and a six.
So, by quantifying risk, by having a common language if you like in that, then suddenly we’re able to build much better roadmaps for clients going forward. We talk about outcome-based investing, which is completely different to what we’re used to. We’re used to judging funds on relative performance, are they first quartile, second quartile, third quartile? That arguably is no longer relevant when you’re actually trying to decide that you have a pot of money or you have a target to reach for a particular event, be it a decumulation event at retirement, how much money do I need to put aside to actually have this sort of retirement that I want, and I think that’s where the advisers are actually moving forward, and the fund groups such as these are actually looking to actually provide those levels of solutions to them.
NICK SAMOUILHAN: Yes, sorry, just to pick up on that. Although there’s been lots of change on the adviser side, there’s been a similar change in the fund management side where, because of regulatory change, because of this exact argument, we’ve had to in many ways up our game and build funds which will directly plug into these needs. So, on your comment about changing risk appetites, we would have to build funds which cover a range of different risk appetites, with different long-term returns, where that kind of discussion can happen with clients saying well you want 7%, this is kind of the risk you need to take to get that level, and our job as a fund management industry is to build the best way we can to fit into that way of talking with clients and away from, you’re right, your benchmark relative what’s the alpha, what’s the beta discussion saying what outcome do you want and can we fit into that process?
PRESENTER: Okay and given that I mean one of the things that always comes up with fund performance is fees. Now I can see, you know, watching this someone will say well I can see the world’s more complex, I can see being a large institution allows you to cover those points off and sort of take care of them, but it’s all got to come at quite a big cost. How does size help the adviser and the adviser’s clients?
NICK SAMOUILHAN: Besides from the fund manager.
PRESENTER: From the fund, yes, for you as a multi-asset adviser.
NICK SAMOUILHAN: So size is a complex thing, and the key thing is not to look at, so first thing obviously look at the top level fee, but what are you getting for that fee? And there are some funds out there that have high fees, most generated because they’ve lots of active funds beneath that, others that have lots of passive funds, but the fee is high because they’re very active in terms of how they do their asset allocation. So it’s a case of going what am I actually getting for this fee as a first and foremost? In terms of bringing down fees, sure, having size helps, we can go to an external provider and get a discounted fee, because we are coming with the assets. And it’s important I think the move to ongoing charges, the greater visibility has helped bring those fees down to the benefit I think of the industry, and it’s meant that when we have size we use that to negotiate lower fees and then pass it directly on to clients and then show a lower ticket fee.
PRESENTER: Tom, I mean because on the one hand the argument is you get a discount for bulk, so that sounds good; on the other hand, hearing all of this talk about resource, you might be thinking it’s an awful lot of PhDs to feed somewhere in the business.
TOM CADDICK: Yes, your assumption that PhDs are well paid.
TOM CADDICK: Not necessarily the case. So I think absolutely size matters. You know, particularly on that multi-asset, the multimanager space, size does matter. It does enable you to negotiate more aggressively, to get the best pricing in the market and to pass those directly onto your clients. I mean what we have done for our Santander Atlas range is we’ve capped those at 1% total charge, so it’s the OCF that we’ve put on-board, to ensure that we’re keeping a lid on the end cost to the client. Now, one of the biggest drags on your portfolio, on anyone’s investment, are going to be inflation and costs; those are going to be the things that eat into your end returns. So keeping an eye on cost and keeping those costs low is vitally important.
PRESENTER: And, Mike, just moving that a little bit, we’ve talked a lot about in some ways the benefits of outsourcing, all of this resource at your beck and call if you’re an adviser, but how much regulatory and investment risk as an adviser do you get off your own shoulders when you outsource and how much responsibility remains with you?
MIKE WEBB: It’s sort of horses for courses, because it kind of depends on the relationship that you want to build with the end financial adviser. But by and large what they remain responsible for is the individual suitability and capacity for loss analysis that client requires, and doing due diligence on the firms that they want to partner with. And the word is partnership, you know, it’s not really outsourcing. Now in some instances we do full risk mapping to their own risk profiles to make sure we have the right sort of individual portfolios set up for them, and in others, because we have a range, we’re able to map pretty exactly in any event. So in that situation the liability that we’re running if you like is we do something that’s innately stupid and puts the portfolio risk far higher than we said we would run. At which point I’m sure they would come after us.
So what you’re doing is you’re essentially delegating the investment risk, not the client individual suitability risk. But that doesn’t mean that funds won’t go down and won’t behave oddly at certain occasions. We had an occasion this year where bond market volatility doubled and equity market volatility halved. Well that’s very difficult for a multimanager or a multi-asset manager to deal with in a very short space of time. But as long as we are doing what we think is the right thing, given the risk profile that we’ve been asked to run that money to, that’s really our liability, that’s what we should be doing.
PRESENTER: Bringing you in on that, I mean if you’re an adviser and you’ve outsourced, what’s the difference between a one-off set of circumstances such as Mike described? I mean just think when you see it as performance terms then something that makes you think my goodness this is really not doing what I thought it was, I need to investigate more.
FRANK POTACZEK: And that’s the thing is, it’s really looking at how you judge an investment manager’s success. And I think all funds have an investment objective, they have an investment aim, and over the medium term, medium and long term, and that’s what we do when we create investment solutions and we’re recommending for clients, we were looking at the medium and the long term, so that short-term volatilities are taken to account. But by and large if a fund manager is keeping to their investment mandate and they are following what they said they did then you know that you’ve chosen the right manager. It’s those managers that play fast and loose with clients’ assets and don’t do what they said they’d do that one should be suspicious about.
PRESENTER: Well when you’re judging funds and fund managers what’s your definition of medium and long term? Because you’re rating them, so at a certain point you must have some key timeframes that you…
FRANK POTACZEK: Absolutely, it’s becoming easier from the sense that when you look at fund manager tenure, a lot more fund managers, certainly in the multi-asset space, are being longer in situ, which is great. So when you’re looking at quant numbers in terms of let’s say Sharpe ratios we have our own QuantRater by which we actually look at the consistency of the performance that’s been given by that particular fund. We’re looking at three, five years to actually get meaningful data; the further back that we can go even better, but we’re mindful of the fact that fund managers do change. So quant only takes you so far. It takes you and it gives you an idea of how the performance should have been based on that investment mandate. So for us five years is a decent time to be looking at the success of a fund and try and see whether that is repeatable in the future.
PRESENTER: Nick Samouilhan, given the nature of the funds you’ve described very outcome oriented, I mean if someone says are you doing a good job, what’s the time period you think it’s fair to judge, and what is it they should be looking for? If not quite return, is it return per unit of risk? How would you articulate it?
NICK SAMOUILHAN: Yes, let me tell you the easy one first. So five years is a very good time to look at and I think shorter than that you can just be in a particular part of the cycle where things are going in your favour. I’d also worry about looking very long in the past, because either what they were doing or the funds they were running 30 years ago, if they were successful 30 years ago, it’s not immediately clear that they’ll be successful in today’s very different markets and very different needs. So it’s a case of this is a relevant fund, this is a relevant track record. Whether that’s four, five, six years, it’s relevance that matters.
On your second one about how do you judge success, it is tricky. The easy answer is to say well if the mandate is to keep it in the level of risk have we done that? But ultimately that’s not the right answer. The right answer is clients are investing in their pensions, their savings for long-term accumulation, or for drawdown or something like that. If it’s long term accumulation, they want a level of return commensurate with a level of risk they’ve asked you to take, and that is your measure of success. Whether that becomes a formal Sharpe ratio-type approach, how you compare that to different fund ranges, so is Sharpe ratio the one you look at or is it drawdown, for instance? And the other one of course if you’ve got fantastic returns during a certain period, when in theory that isn’t really a period you would normally get high returns, that should also be a red flag, what are they doing up there, what’s broken down?
So it is a very very tough question. It’s why the attractive peer groups are still there. It’s very easy, have you outperformed, or what’s the average, are you above that? That’s not the case for these new outcome-based funds, where it’s a much trickier and hopefully a far richer conversation of what you’ve done.
PRESENTER: We’ve given couple of technical terms in there for those that aren’t, Frank, could you give us a definition of Sharpe ratio to assist? You look quite relieved I didn’t come to you then.
FRANK POTACZEK: It’s effectively a risk-adjusted return. So essentially what it’s saying is for every unit of risk that you take what’s the return that you’ve provided. So you can assume that for every unit of risk you want a unit of return. A successful fund manager for every unit of risk would actually return more than one, so a two to one let’s say ratio. But the problem with that is that it doesn’t take into account drawdowns. So something called Sortino’s has been thrown up as a potential measure; we’ve used Sharpe’s for a number of years in our industry. Arguably for clients it’s how much money will I lose over the period when I’m invested in that particular fund, whereas in the investment world traditionally we’ve looked at Sharpe ratios as a risk-adjusted measure. Should we not be looking at that as an excess about what is a potential drawdown being invested in this particular fund?
PRESENTER: Nick, so you want to come back on drawdown now.
NICK SAMOUILHAN: No, no, just agreeing completely. This idea of what risk you’re taking is important, because risk often gets confused with volatility, and that’s just one measure of risk, and it’s a case of how much, volatility is just a measure of stability, and that doesn’t tell you very much because things like drawdowns matter, but also one of the other risks which is out there is not getting enough return to retire when you want to retire. Which is another way of looking at this idea of if you’ve outsourced is my client going to get the return they need to get to retire at a certain time? So returns need to be part of a success measure.
So it’s a far more complex idea. You can’t just sort by one ratio and say the top one is the one I’m going to pick, it’s a far more complex idea of how will they generate the returns, do I understand that, and is it aligned to what I want my client’s money to be arranged at?
PRESENTER: Well, picking up on that, Tom. I mean obviously you’ve got mandates, you’re running money specific mandates, but behind it all as Nick said they’re sort of real people, advisers, clients, what do you, I suppose how do you try and work out what your sort of typical client is per mandate and your sort of sense of making sure that they’ve got enough money at the end of their journey or, you know, if it’s a drawdown strategy it’s one that you’re running in a way that doesn’t harm capital, whatever it happens to be, how do you think of it in human terms?
TOM CADDICK: I think part of that answer is, going back to this idea of a partnership, you know, Nick alluded to the fact that I think as fund managers we’ve had to up our game over the past years and move from this space, Frank was touching on this as well, move from that space into providing a product that’s sold and it’s up to the adviser to decide whether to invest in it or not to a more solution-based approach. So our approach is to take on a more adviser and client focussed approach in the way in which we’re producing our portfolios, and to provide them, to tune them into the way in which the adviser is segmenting and advising their clients on their outcomes and the suitability of investment.
So each one of our portfolios would be designed for a certain client type to meet their risk return expectations, you know, to try and tackle things like as Nick said shortfall risk, as well as just returns based or levels of risk, drawdown, whatever it may be, it’s to try and take that more holistic approach.
PRESENTER: So how much feedback do you want from the frontline from advisers in terms of what their client needs are to help you either tweak existing products or produce new ones?
TOM CADDICK: See constant feedback is the answer. I mean it should be a two way dialogue in terms of what we do. It’s not about necessarily influencing your style of investment, of course that’s not what we’re looking at, but we’ve put a lot of effort into the literature that we provide, you know, the way in which we describe risk. I think, as Nick said, it’s not a two dimensional or one dimensional view on risk, it’s about sort of that richer conversation to have with the adviser and by extension the end client.
PRESENTER: Now, Mike, we’re talking a lot about sort of the risks that are out there to you as an adviser and your business why the resource of multi-asset can help you there, but assuming you’ve switched across and you’re now outsourcing, how can it help as an adviser? How does it help your business and most importantly how does it help your clients? What are some of the key wins there?
MIKE WEBB: The really critical point was one that was made earlier which was that if you decide that having your own in-house investment proposition’s really just getting too much for you, (a) it reduces the specific liability of that particular part of your business, but (b) it allows you then to focus on holistic financial planning. And I think lots of people thought well how am I going to justify the cost of doing that? Well actually the reality is if you don’t get that piece right, if you don’t get the correct piece of advice both from tax wrapping, what sort of risks you’re looking for, what sort of returns you should look for, what are the ancillary financial products are relevant to your situation, that will cost you a lot more in the long run than anything else. So I think that people are getting more and more used to the idea of holistic, this sort of idea of holistic financial planning.
So that really is one of the big things, because it allows you then to focus and to get known and focus your customer service on that particular part of the journey if you like. It’s being added to by for instance complexity in pension funds. I mean I think we’ll welcome the idea that we don’t have to buy annuities anymore if we don’t want to, but it’s still a very very complex area when you’re talking about financial planning. And I would certainly expect to go to one as you start reaching towards retirement to work out what on earth I’m going to do. So I think there is plenty of room for those people to outsource.
I think the second thing I would say is the sort of second wave of outsourcing appears to me to be coming from two things. One which is that financial advisers are getting much better about segmenting their client base, and they’re recognising that there are different types of solutions that are appropriate for different types of clients. So for instance full bespoke discretionary fund management, now typically they’re looking at clients from around £250,000 plus, MPSs at sort of £50,000 and below, and unit portfolio services, multi-asset funds from £1,000 upwards to about £250,000. So all of that is making them more comfortable with the idea that, you know, we’re beginning to outsource.
I think the second thing is regulatory pressure. I mean as visits etc. start to become more clear and the FCA ask for more information about how you go about things, people are realising that yes you really have got to up your game. You can’t just do fund selection in the old way, which was, you know, what’s first quartile, let’s pump some money in there.
PRESENTER: But do you have any evidence from perhaps the people that have outsourced to Rathbones that, I wouldn’t be trying to suggest they’re writing letters saying I’m now doing more protection business than ever before, but just sort of anything that you can measure how it’s made their business more successful, or is that an anecdotal rather than a statistical thing?
MIKE WEBB: I think at the moment for us it’s anecdotal, but we get, you know, obviously we deal with a lot of financial advisers out there and they’re all saying that it saves me a huge amount of time and allows me to do my job an awful lot better. Now remember of course outsourcing takes many different forms, so some people are quite rightly using Defaqto and other sort of research agencies and keeping parts of their investment proposition in-house. That depends on what you think is right for your client base. But I think outsourcing generally is recognising all the anecdotal evidence is coming back saying yes this was the right thing to do for me.
PRESENTER: And it’s interesting just picking up on that point, Frank, because you were nodding as Mike was saying that, I mean if anyone looking at this space, are there sort of rules of thumb as to where you should be looking for full discretionary, for managed portfolio services, for multimanager funds, or does it depend a little bit on the provider?
FRANK POTACZEK: I think it could depend on the provider, but let me sort of bring in the regulator and sort of say well the right product or the right solution should be for the right client, it’s all about suitability. Arguably, traditionally, an awful lot of larger clients went to a bespoke proposition. They wanted that higher level of service. But nowadays when we see what’s happening in the discretionary market, a lot more of the bespoke-type portfolios are tailored. The big discretionary managers are looking to de-risk their businesses to make sure that if a balanced client for want of a better expression looks the same as another balanced client, and it just seems to be that if an intermediary’s client has a lot of complexity in their needs, tax planning, succession planning etc., then bespoke, regardless of their size, that should be the solution they’re looking for.
Obviously costs play a part in that. We’re not seeing an awful lot of clients who have got a large amount of money going into a unitised proposition, a unitised proposition has CGT benefits inside, and therefore if you want to put £100,000 into a multi-asset fund, whereas advisers tended to have three or four blended portfolios, we’re now seeing them actually go for a Santander, an Aviva, a Rathbones with a large amount of money. So it’s really what is most suitable for the client rather than judging the client’s needs by the size of the amount of money they have to invest in?
PRESENTER: Picking up on that point, Tom Caddick, the sort of idea that perhaps what might once been seen as bit more of a mass market product actually has fantastic applications further up the sort of economic scale. I mean do you go along with that, this idea of just DFM is right above a certain level is a little hackneyed?
TOM CADDICK: Completely, well, number one, we don’t purport to be a one size fits all approach. We don’t encourage people to only partner up with us and think there’s room and there’s sense for a blended approach where it’s required across different approaches, different processes. But in terms of that size of investment, certainly what we see evidenced based is that you have a huge range of investment sizes that can come in. And it can range all the way up to, I couldn’t tell you offhand where our top level is but probably north of a million sterling as an investment going in. What you do see is that in many cases as a client investment increases in size the complexity of their needs may also increase. Also their requirements, just general requirements, that’s where you might start to see more options opening up to them and that becoming more appropriate. There’s certainly no cut-off I think from a unitised approach. You have your minimum investment amount, which as Mike says is typically very low. It isn’t a maximum amount. It’s just that in some cases the clients become more complex, which is where DFM can be really very very powerful.
FRANK POTACZEK: And if I can just come onto that point, if you have an awful lot of money, let’s say £5m, you can go to one of the discretionary managers and they’ll set up their own private unit trust OEIC for you. So there are benefits of unitising even large amounts of money beyond a bespoke proposition.
PRESENTER: And one of the things we were talking about is this issue of partnership, Nick Samouilhan, I mean obviously you’re on the fund management side at Aviva, but how much responsibility do you feel as a product provider to be I suppose providing things other than pure investment in terms of communication, education?
NICK SAMOUILHAN: Oh absolutely, it is a large part of the role. It is not a case of just going and sitting in a box and then just generating performance; it’s if you outsource it has to be on equal terms. It means regularly meeting, it means making sure everyone’s accountable with how you run the fund, what you’ve done in the fund, and ultimately you can have the fantastic proposition which would fall down if just the very basic information isn’t given across. And we spend as much time making sure we communicate what we’re doing and how we’re doing it as we do running the fund, it’s as important, because of this whole partnership thing, it is that way.
PRESENTER: Mike Webb, I mean everyone is always talking about buying things on platforms, making the process of buying, selling, topping up easier, how much of your time at Rathbones is spent not so much on the investment, but making sure your products are easy to buy and sell?
MIKE WEBB: Well again it depends on the product. As far as the funds are concerned, we spend a lot of time making sure they’re as easily available across the platforms as possible. With our unit portfolio service and with our discretionary service, actually we don’t put them on the platforms. Our view being that we need custody of the assets at that point so that we can react quickly to market changes etc. And in fact by putting them on platforms you’re just increasing the administrative cost, and as we all said, you know, TERs are very front of mind.
So it kind of depends on what service or product you’re talking about as to whether you do it. But yes I think platforms have a place, have a very important place. I think the last set of IMA results something like 58% of all new business was written through that platform, which is a really hefty increase in market share. So it’s telling you that people are beginning to use platforms as the regulator expect it.
PRESENTER: And Tom, any other if you like non-investment elements that an investment outsource partner should be providing?
TOM CADDICK: So the investment provider should be providing?
PRESENTER: Yes, I mean we’ve talked about ease of access is obviously one element of there, some of the education material, the reporting lines there.
TOM CADDICK: No, I mean well I think number one everything is investment related. So I mean when it comes to the literature this is all tying in, this is part of the investment proposition, is not just the underlying numbers, is not just the unit price, it got what goes around there; what’s the proposition itself, not just a product. So it’s the literature, it’s the support, it’s the face-to-face time that you can offer, which is absolutely vital, it’s ensuring you are doing what you’ve said you’re going to do. I mean Frank alluded to this very early on in this conversation, which is about judging you against the objectives, which is absolutely vital. It’s about making sure you’re communicating when times are tough, not just when times are good. So, you know, when assets are going through a rocky patch or we received some asset losses, it’s communicating and keeping that communication going and during those times not just in the good times that I think builds up a strong investment partnership.
PRESENTER: Okay and we’re almost out of time. I was going to ask each of you - I’ll start with you Mike - for a final thought on how outsourcing or partnering can help advisers and their clients? If you could leave one thought with advisers what would it be?
MIKE WEBB: I would say, you know, have a very good look at your own business proposition. Ask yourself what really makes a difference to the customer and am I good at each of those elements? Because if you’re not or if you think that somebody else could do it better, then I would focus on the holistic financial planning and allow the investment experts to enhance your proposition. Because it’s not about detracting from it, it’s about enhancing it through the partnership.
FRANK POTACZEK: I would say it continues to be an ever-increasing complex world. The investment tools that the multimanagers are using are becoming more complex, which means that as an adviser you’re having to make sure that you understand what those tools are as well as the fund manager. It’s much simpler to be able to take a top-down view and get the experts to actually build the portfolios for you.
NICK SAMOUILHAN: Straddling both of those, you’ve got complexity on both sides, you’ve got complexity on how you interact with your client and the regulatory on that aspect growing and then you’ve got markets becoming on the other side much more complex. And just like I am not an expert on picking stocks in say Asia I would rely on someone to tell me what the best stocks are, it’s a similar process here, where there’ll be one expert on understanding the client’s broader holistic financial position and then on another part of that the expert to go out there and invest the money in the markets.
TOM CADDICK: I think it would be that partnering up with investment partners who are aligned and attuned to your advice process in a way in which you look at clients can be an extremely rewarding process, not only for you and your business but also and most importantly for your end client.
PRESENTER: We have to leave it there, Mike Webb, Frank Potaczek, Nick Samouilhan, Tom Caddick, thank you all very much.
ALL: Thank you.
PRESENTER: And thank you for watching and from all of us here goodbye for now.
In order for you to consider the viewing of this video as structured CPD, you must complete the reflective statement to demonstrate what you’ve learned and its relevance to you. Among the topics covered in this Academia filming session are the changing regulatory and investment backdrop for advisers, picking an outsourcing investment partner and where regulatory responsibility lies in the outsourcing process. Please now complete the reflective statement to validate your CPD.