Roles in The Retail Investments Moving Forward

So change is happening....We are hearing more from client facing groups about how they are going to change the industry dynamic, become investment 'manufacturers', pay platforms rather then receive monies from them, and change a lot of the industry from 'price makers' to 'price takers'. What is this going to mean in terms of the roles (and titles) of industry professionals, their firms, and where is the big money (or just survivability) going to be ?

Whilst I suspect there will be variants, in this new world it seems that the key roles may be:

• Client Advisers - this is all about providing 'context' for the client to help them make decisions within. Whilst the people that cant afford to see professionals to provide such may have to go on-line (and there are some great new sites to help them), the ones who can afford such will be paying client advisers for context in conversation. The more complex a client's situation, the more the challenge to find the right 'context', which will most likely include attitude to risk and loss (Thanks Paul !) . Should the client context fit within an advisory firm's scope, an output from the process of determining context is setting and choosing investment strategy with any accompanying client specific instructions. As value is what is received by the client, not what is given, it is likely that those advisers with the skill and ability to provide real context to clients will be in a sustainable businesses.
• Asset Allocation and Selection Experts - whether this be working out asset allocations that suit clients attitude to risk and loss, or the selection of individual investments (whether funds, ETFs or stocks), these people are going to be the ones responsible for constructing a variety of model portfolios with 'target' or 'theoretical' allocations to asset classes or assets.  These are the model portfolios that the advisers choose for their clients. The more sophisticated firms will seek to extend to separating asset class categorisation from specific investment selection as they realise that clients current assets don't need to be replaced to support a desired asset allocation. People in these roles may use a variety of techniques to determine their selections, may end up being largely quant driven, and may adjust their model portfolios on differing time frames depending on what the purpose of the model portfolio is. Many suspect that these roles will be either salaried in house employees to advisory firms, or perhaps specialist groups who provide such on a contracted service basis.
• Implementers - these roles are the people in a model portfolio based world that do the manufacturing within client portfolios. Constantly monitoring the changes in drivers of client portfolios (ie market prices, model portfolio constructions, or client rules), this role is responsible for ensuring that (and will be measured by how well) client portfolios track their nominated mandates (model portfolios combined with client specific rules, preferences and constraints) as determined by the clients' advisers. Good implementers will react quickly to changing market conditions and model portfolios to outperform their competition to leverage the capital markets. Implementers get efficiency of scale by working their client portfolios as an overall book, treating clients fairly and getting economy of scale. Service levels will be the key differentiator followed by price and I suspect that there will be a few high volume providers or enablers (like Financial Simplicity) that will fill or support this space
• Dealers - these will be the people who attain the results from the market that the implementers deem appropriate for the client portfolios. Dealers are close to the markets and good ones reliably perform by getting results for their clients, whether just in terms of service levels or price efficiency compared to others.
• Platforms (or Administrator) - these will be the businesses that operate 'asset containers' on an outsourced basis for investors and advisory firms, and will be paid service fees as opposed to out of client's assets. It is shaping up that this area of the industry will be differentiated by ease of access to information, technology integration, range of investments available and service levels first, and then price second as pricing levels will be driven down by high scale operations.

The Difference Between Discretionary Investment Management and Model Portfolios

I have been involved in much discussion in the last few weeks about the difference between Discretionary Investment Management (DIM), often a service to the wealthy, and the use of model portfolios which may be 'managed' by investment platforms.

At first glance there is some similarities from an operational perspective, especially if a DIM firm uses model portfolios as a starting point for packaging investment research into a form of scalable offer to many clients. Similarities can include the use of model portfolios and an authority for someone to occasionally rebalance the clients portfolio towards the model portfolio. However from a service proposition perspective things can be quite different, as I have tried to bring out in the diargram below:

 From a servicing proposition, a DIM is usually pretty clearly responsible for all aspects of the service to a client. the DIM firm packages up research, investment selection, portfolio management and administration often into a single accountable offer.

The provision of a vanilla model portfolio service clouds the proposition a little in the sense that the model portfolio may be sourced from a third party, and the implementation of the model portfolio may also be performed by a third party (usually a platform) also. However with adequate discolsure and explaination, these 'straightjacket' model portfolio offers are getting increased traction, albeit with some concern from regulators and commentators, who are suggesting that the 'implementation' of model portfolio decisions may need to reflect the clients' specific situation. These concerns seems pretty reasonable as the implementation process is actually often buying and selling investments for clients and whilst such decisions may be accurate in the context of a model portfolio, they may may be not in the interests of the client. MMmmmm. So how is this possible conflict to be resolved ?

The answer must lie in allowing adviser or clients to provide some instructions on how to implement model portfolios for their specific circumstance. At Financial Simplicity we call these clients rules, preferences and constraints, and believe that the ability for advisers to provide such instructions help implementers (who have no relationship with the client usually) deliver improved service to investors, and hence support their advisers, aswell as address concerns about investors receiving a '1 size fits all' experience against their wishes.

Clearly this does however create a headache for implementers not equipped to deal with such instructions from advisers and their clients, and the problem magnifies and magnifies the larger the client base becomes. This is where specialist technologies come in..

Clients pushed into model portfolios

Interesting article on the FT web site about how retail investors are being pushed into unsuitable “one-size-fits-all” investments as portfolio managers change their offerings ahead of new regulations, the UK’s financial watchdog has warned.

The article is at:

http://www.ft.com/cms/s/0/bc9622c4-7e3c-11e1-b009-00144feab49a.html#axzz1rtUjoCFX

Whilst the article doesnt give the answers, it does lead to many questions about possible floors in the product based regulatory regime to date. Some things come to mind:

• what is the 'risk' profile associated with the offer to the clients, is it that of the 'risk' profile of the 'product' or the overall 'portfolio' (in this case model portfolio). As most people know, the 'risk' of a diversified portfolio of risky 'products' is diminished when offered as a portfolio ...
• what is the basis for assessing 'risk' ? Is it based on the past volatility of investment valuations ?, is it based on the relative level of valuation of such assets (which more and more portfolio managers seem to be working on), is it based on the 'risk' that the client feel comfortable or not, or perhaps even meet their goals ?
• is it appropriate for clients to be 'shoved' into what we are now calling 'straightjacket' model portfolios (one size fits all) ? or is a level of client specific overlay a basic fundamental part of assigning a model portfolio to a client, and the ongoing portfolio management to such ?

My belief is that we are in transitionary period in the wealth management industry where we are moving from a mentality about using modern portfolio theory to justify prescribed asset allocations according to industry practice, and often being an excuse to sell products to fit, to one where wealth advisers are going to have to be more pragmatic about how they manage their client portfolios on terms that the client understands, such as 'we will buy this now as we think it is cheap' etc.

The question that follows then is 'do model portfolios achieve this ?', or more to the point 'does the technology and operational processes that you have in place support this type of client engagement ?'. At Financial Simplicity we have worked with some great individuals and firms to possibly have the answers.