Advice or Discretion:  Which Management Tool Is Best?

Advice or Discretion: Which Management Tool Is Best?

Date : 22 Sep 2017
posted By : eff_admin

2008- That fateful year when the economy came crashing down around us. We see the effects of this downturn every day in nearly all aspects of our life. I do not wish to labour this point, as after all it is becoming rather old hat in financial articles! However, I would just like you to focus on how the financial crisis has effected your investments. Low interest rates and high inflation have led to some dramatic volatility in the Stock Market, with some equally deplorable falls in growth and income from many types of investments.

Unfortunately, we mere mortal Financial Planners cannot change the performance of the market, but we can still strive to improve your investments. But how?

The problem that many investors face is that the markets are changing at a mercurial rate. As a Financial Planner, when I notice these changes I will always recommend that my clients move funds, in order to improve performance. The difficulty is, that in order for me to do this, I firstly need to obtain their authority. By the time this has been done, the markets could have significantly shifted once again. A vicious cycle, I am sure you will agree.

At Efficient Portfolio client care is our top priority. With the current mayhem in the markets, and the rather archaic system deployed in order to obtain client’s consent, I felt that this was not being delivered. I want to ensure that my clients are receiving exceptional service and at the same time seeing success in the performance of their funds.

At present there are three types of Fund Management systems:

Advisory management

This is generally how most IFAs that manage the money do it. They have to get the clients permission (usually in writing) before any investment changes are made.

The main problem with thissystem, is that clients respond at different times to fund switch requests, if they reply at all. By having to ask the client each time whether or not they would like to switch fund, vast administration is created for the IFA. This removes the incentive for the IFA  to make switches in the future, as well as meaning that whilst managing a number of portfolios with a centralised aim, some clients who do not respond end up in an out of date portfolio. Also, many IFAs are not competent at building their own portfolios, so clients often end up in managed solutions which generally produce lower returns.

There are of course some benefits to using Advisory Management. The most evident reason is that, if the IFA is of a high calibre, they will fully understand theirclient’s needs and circumstances better than other advisers. If this is the case, the IFA is in a position where they can tailor the investment solution to the client.  At Efficient Portfolio, this is the system we have used up until now.

Discretionary management

Discretionary investment management means the investment management is usually outsourced to a 3rd party discretionary manager (DFM). They design the investment strategy and control the investments instead of the IFA. These professionals are granted the power to make swift decisions on your behalf. This is their sole job, so your investments are given the time, care and attention that they deserve. A DFM can make switches when they think it is right. They spend more time on the investment management so have the opportunity to generate better returns, although of course this does not always happen.

In reality, most people that invest through a DFM end up in a Model Portfolio solution. The client ends up with a very similar portfolio to lots of other clients. This is because the DFM rarely knows the client as well as the adviser. Also, there is an extra layer of cost to pay the DFM as well as the IFA. It is a large admin exercise to move lots of clients away from a DFM that is not performing well, and this again discourages IFAs from recommending  a move to a different DFM in the future.

Our solution

At Efficient Portfolio, we employ a blended strategy, which takes the positive elements of both Advisory Management and Discretionary Management .We use a DFM at fund level but control the strategy in line with their financial planning needs.

There are many benefits to this including;

  • The investments are changed immediately once they are needed.
  • The total cost is in line with advisory management.
  • The adviser controls the risk and timeframe strategy, which can be altered in light of changes in the clients life or needs that are highlighted in their annual review.
  • The investments are on a platform, so if the DFM fails to perform, the clients can be switched away and into another fund or strategy very easily.
  • We sit on the investment committee with the DFM to give our guidance in investment decisions whilst also playing devil’s advocate to their decisions.

As a Financial Planner, I will sit down with each of my clients individually before any new Investment Management Strategy is employed. Together, we will analyse your current appetite towards risk and review your individual goals. We will then set out some ‘rules’ for the Fund Manager, making them as flexible or as rigid as you choose. After this rigorous, due diligence assessment, we will then discuss the most suitable and appropriate portfolios applicable to you. From this information, a bespoke Fund Management Strategy will be created for you; this is as unique as you are. The Fund Manager will have a set of rules and will have to operate with your goals central to their work. As I will oversee their performance, I will also ensure that these rules are being adhered to.

The rest of your finances will also benefit from this switch. Undertaking the research and conducting the management of investment portfolios is an incredibly time consuming job. By enabling a Fund Manager to oversee your investments, Financial Planners are able to focus on their core competencies such as Tax and Retirement Planning. For Efficient Portfolio, this will also give us more flexibility and time to see our clients on a personal level to discuss their wider investment needs, rather than spending time on compliance reporting. This blend of Advisory Management and Discretionary Management will enable us to build stronger relationships with the people most important to us; our clients.

This Fund Management system is not mandatory; in fact it is quite the opposite. We will not recommend it to any of our clients until a full review has been conducted to ascertain suitability and the gain the full consent of the client. Whilst we feel that this type of Fund Management holds many benefits for our clients, it is not for everyone.

If you would like to discuss this service in more depth, we would be delighted to talk to you.

Please call 01572 898060 or email charlie@efficientportfolio to arrange a convenient time to go through this subject.


Disclaimer This document is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence of it without consulting a suitably qualified and regulated person. It does not constitute financial advice under the terms of the Financial Services and Markets Act 2000. It is not an offer to sell, or a solicitation of an offer to buy, the instruments described in this document. Past performance is not an indication of future performance. Interested parties are advised to contact the entity with which they deal, or the entity that provided this document to them, if they desire further information. The information in this document has been obtained or derived from sources believed by Efficient Portfolio Ltd to be reliable, but it does not represent that this information is accurate or complete. Any opinions or estimates contained in this document represent the judgement of Efficient Portfolio Ltd at this time, and are subject to change without notice. © 2016 Efficient Portfolio Ltd.

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