Investment Week, in association with Scottish Widows, asked financial advisers how they feel about investment outsourcing and found out from providers what they feel is necessary for a strong outsourcing relationship
MW: When many people hear the word 'outsourcing' they think of call centres in India, so I think we should start off today with a definition of what we mean by investment outsourcing.
AF: I am not too keen on the term outsourcing. What we are talking about is delegating investment decisions or investment choice to a third-party. It can be about delegating the authority to another adviser, to a particular firm to take those investment decisions on behalf of an adviser. We have many options. We have 16 multi-manager solutions; over £4bn worth of assets are run in this particular way, ranging from multi-manager solutions through to fund-of-funds-type solutions. Also, we have discretionary fund managers who we have appointed via our retirement account fund supermarket platform. Those are the three areas: discretionary fund managers, multi-managers and fund of funds.
MW: One of the big questions in this area is how comfortable advisers are with delegating responsibility, whether they actually do see it as delegation or if they feel it is abdicating their responsibilities. As an adviser, how comfortable are you with giving up a little bit of control?
JN: That is an interesting question because I think it comes back to terminology. Outsourcing, it is not a popular phrase because I think it suggests that the adviser who is making the decision to outsource to whichever of those three methods is delegating and abdicating all responsibility. But whichever of those methods you are using, the adviser should still be monitoring performance and, if the performance is not good enough, then make a decision to move accordingly. So in theory I do not think there is any problem with outsourcing, delegating, whatever term you use - we just do not do it. I think the adviser needs to take responsibility, though, for the decisions they make.
DW: There is no possibility of abdicating responsibility, you have to be with the client through the whole experience and you would want to be with the client at the manager review. You would need to have a process in place that is as thorough when deciding on the choice of which manager to delegate to, as you would for choosing your own funds within an IFA firm. So it is definitely not abdication, it is delegation of responsibility and ongoing review is required.
MW: What level of outsourcing do you personally feel comfortable with?
DW: It depends on what the client is asking for and how able are we as a firm to provide the investment expertise that they need. I would say about 10% of Informed Choice clients want to delegate the authority to a third-party fund manager, and that can be typically the entrepreneurial client who wants to be very much involved and talking to the discretionary fund manager about detailed investment choices, and there are other clients, obviously the bulk of those within Informed Choice, who want the IFA to be involved in the whole client experience - they are the trusted adviser, they have created the financial plan. One must remember that the investment solution is quite a way down the line of deciding what is right for the client. There is a lot of work and a lot of trust imparted between client and adviser. As long as the skill set is within the firm and the amount of time has been spent on developing a research and investment platform that is going to work, then the client will invest via the IFA.
GR: We see it very much as working in partnership with the IFA. The IFA would be concentrating on the financial planning advice, and we work with the IFA to provide the investment solution that is bespoke to that particular client. But as the clients' needs change through their whole life, as they move more towards retirement when they want to take benefits, all this information is invaluable to us to make sure that we manage a portfolio that is appropriate to that individual client. So we see it very much as working in partnership with the IFA, about giving the complete solution to the client.
MW: There are a lot of issues around what the IFAs' liabilities are when they outsource, how much responsibility they are giving up as far as the due diligence process. Alasdair, how do you think IFAs need to interact with the outsourcing provider in order to make sure that all based are covered for the client?
AF: The key document is the terms of reference, the agreement that the IFA has in place with the particular discretionary fund manager. The issue I believe they should be focusing on would be the risk rating of the fund that may be being selected - where this risk rating comes from. Is it being provided by the data provider, ie the life office provider (ourselves) or is the risk rating being done in-house by the discretionary fund manager? Obviously, the disclosure of fees is also significant. It is important to know how that disclosure is done, and whether or not it is on an implicit or explicit basis. And, in terms of the agreement between the discretionary fund manager and the adviser, the review period should be agreed, probably at least six-monthly.
All these things come into play from a reporting point of view. But, as Glen is saying, I guess it is more about building the relationship between the discretionary fund manager and the adviser. This is the magic ingredient, or the catalyst in terms of making sure that the relationship is long term.
GR: Absolutely - it is very much about working in partnership. The IFA will then have more time to concentrate on the financial planning issues whilst overseeing what we are doing from an investment management point of view. They get online valuations, they have direct dial-through to the investment manager, they can email the investment manager so if a client is coming in in the afternoon there is nothing to stop them picking up the phone, having a quick overview with the investment manager before seeing their client.
MW: I always think a good analogy is to think of the financial adviser as a GP, somebody who looks after your health as a whole, and when there is a specific problem, that would be outsourced to a consultant who's an expert in that area.
GR: Absolutely.
MW: James, you came from first an accountant and then a private stockbroker background. Were you drawn to being a financial adviser in order to take care of the client as a whole rather than just one specific area?
JN: Well, yes. I was a private client stockbroker for about six years and thoroughly enjoyed it, but fund of funds really took off in that period, the whole asset allocation story really took off in that period. But also, while I was there I also did a lot of research. I was reading about passive fund management and I was looking at the charges that clients incurred, and I also took the Certified Financial Planner exam and that was pretty fundamental because that was all about, I hate the word holistic, but I will use it because it is looking at clients' total finances and lifetime cashflow planning. And our view is that the real value add for the client is in the long-term strategic planning, but we see fund management as a commodity product and we like to get it as cheaply as we can, to keep the costs down for the client.
MW: Passive funds - I think that is another area that we do not necessarily think of as outsourcing. We think of multi-manager, we think of discretionary, but the idea that you think that you are not going to beat the market so you might as well go for as low cost of a product as possible….
JN: Yes. I do not know if you would see using passive funds as outsourcing or not. What we do is create a portfolio for a client using the best passive funds we can. We have our own asset allocation model and we do it in-house and it seems to work.
DW: You do not want to pay for beta but you are prepared to pay for alpha, and tactically I would use passive funds. I have been a fund manager for most of my career so it is a good job I do believe in active management. I think it [alpha] is difficult to find, as statistics show, but enough time and effort invested in the research can draw out that alpha. And of course cost plays an important part in whether you are being given alpha or not. Low fee passive funds can often be the right choice.
Also, making an asset allocation decision, for example, might be making a short-term tactical change. When we invested in Malaysia, for example, rather than buy an active fund manager, we selected an index tracker because we knew it was tactical and we would be coming out soon - and as fate would have it we came out six months later. It would be wrong to own an active fund manager for that six-month period and not give them the chance over the cycle to produce the alpha.
MW: Mark, I am sure you are relieved to hear Dermott does believe in active fund management, but James and Dermott both raised the issue of cost, which is always a concern with multi-managers.
MH: It is seen as a big issue but I think you have to step back and have a look at what is being delivered. I think there is an argument for using both passive and active because they do different things at different times. In a raging bull market, you want to be in, you want to use tracker funds because active managers in the early stages of a bull market do not tend to participate. We have seen that again recently. They do not tend to buy into quite risky stocks, quite cyclical stocks, quite heavily indebted stocks at the early part of a bull market, they wait for a trend to develop. So it makes a lot of sense, as we have done recently, to buy iShares [ETFs] to fully participate. The flipside, of course, of using some sort of passive vehicle, is its full participation in bear markets and, to our minds, that is not the time to own a passive fund because the problem is you are going to go down with the market and a bit more because of the costs of running that fund. And a lot of value can be added by active managers through the use of cash; certainly our focus in terms of managing money is to preserve capital first and foremost and then to add value over time.
I think the fixation with charges is something we have to be a little bit careful of. I mean if you look at the numbers of high-profile managers like Neil Woodford, he is up some 94% over the last 10 years, the market is down 6% over that period. Crispin Odey, who we use, since the inception of his Odey Opus fund, is up 92% with global markets down 14% since 2001. So I think the difficulty here is always talking about averages. If you can identify exceptional managers, and there are only a very small number of those, then I think there is certainly a route to adding significant value over time. But I would suggest that using both is a sensible route, depending on the point in the cycle.
JN: Clearly there are a handful of star fund managers out there. But they tend not to be very consistent. I agree Neil Woodford has done an amazing job, as has Crispin Odey, but how much of your clients' money are you going to have in that fund? Probably not a huge amount. You look at Andy Brough, another star fund manager, he was quoted recently saying he would have been better off in a tracker fund than in his fund.
Tracker funds are often cited as being dangerous to be in in falling markets, but there was - I actually took a note of this because I had a feeling this may come up - research by Standard & Poor's out on April 21st and it looked at the performance of the S&P 500 from 2004 to 2008. The conclusions were 71% of active large-cap funds underperformed that index. You then look at the mid-market, 76% of mid-cap funds underperformed. And you then go to small-cap funds and it was 85.5% of funds. So some funds are outperforming, I'll give you that, but it is not very many and the consistency of those funds is not great. That research was for the most recent downturn but they found exactly the same results in the last downturn, 2000 to 2002. It was not just US funds, it was international funds and it was fixed income - these figures are across the board.
MW: Matt, I know Defaqto puts out regular multi-manager reports, maybe you could give us a bit of a background on what you have found - is the multi-manager doing the job of choosing the 15% of the managers in a certain area who are actually outperforming?
MW: Well firstly, even though IFAs have a choice to outsource or delegate, they still have huge choice so I think we must not underestimate the fact that the due-diligence process - whether they choose a managed strategy, a multi-manager, a fund of funds or a DFM - is still their duty as the manager of the client relationship.
And I think you are always going to be able to talk about cheapest versus most expensive, but the thing that we have seen more recently is IFAs looking for value for money. The key there is, is it doing what you and the client sat down to do? For example, access to cost-effective tracker funds is a way to get back into the market, and as Mark said, that might be the call to make at the minute but there comes a time when you want the expertise - if you and the client are prepared to pay for it and that value's being delivered, that is the important thing. We are all prepared to spend money on things we feel are good value - it shouldn't just been seen as what's cheapest against what's most expensive. That said, obviously current market conditions are going to mean that there is a focus on price, and I think the thing for multi-manager is when people look at TERs, one of the conclusions they can come to is it can look top heavy, but again I would say it should be about looking for value in what's being delivered.
MW: We have mentioned a few situations where perhaps it is better to be in a passive fund or where a manager is actually able to add alpha. But in what situations and for which clients would you choose to use a fund of funds versus a manager of managers fund versus a discretionary fund manager?
DW: I think tactical decisions around the strategic asset allocation would call for a passive solution. Using manager of managers or fund of funds often comes down to the size of the client. Manager of managers you have a direct holding and a common custodian, you have one manager investing into one client account alongside other manager of managers. Typically that is the institutional solution and in the tens of millions.
Fund of funds is used more for the private client. We would tend to use that solution because we believe in an active fund of funds approach built around a strategic asset allocation.
GR: There is no right solution for every single client. Obviously the focus for the IFA is to decide which is the most appropriate for that particular client, and that is the added value that they provide. With discretionary fund management, you are normally looking at larger sums to be invested, so we are normally looking at investments of £100,000 plus, and typically the average size of a portfolio I support would be in the region of about £300-400,000.
Some of the added value we can provide as a discretionary fund manager is we can feed the money into the market, which has been particularly relevant over the last 12 to 18 months. We can make those investment decisions today and get that money invested today. And vice versa, if there is something that we wanted to remove from a client portfolio, we can see all investments in all of those client portfolios, decide which ones we want to encash and at the press of a button that is done.
AF: Fundamentally it is about choice - we are not going to say there is one particular solution or one particular fund range is the best for all markets and all requirements. It is providing links to, in our particular case, 17 external fund manufacturers. The lead manufacturer is Swip and Swip has the automatic right to say whether or not it can build something for us. How does that look as far as the positioning is concerned? Single manager approach, active manager approach, passive manager approach through to manager of managers, through to multi-manager, through to full-blown fund of funds.
For instance, we are delighted to be announcing two high quality fund of funds launches at the end of the month, with Mark leading the fund management side. However, at the other end of the scale, we recognise that there is a requirement for passive, particularly in the corporate marketplace and in the EBC marketplace where the funds are being used probably from a core-solution perspective or a tactical perspective. It very much varies market by market, but the key thing from a Scottish Widows point of view is to provide choice - it is not our job to drive the assets in particular funds, it is the intermediary's job to make that decision.
MH: There are two topics here. One is the method of delegation, so whether it is a discretionary fund manager, whether it is a manager of managers, whether it is a fund of funds. A separate point is actually how you implement that delegation, so whether it is active or passive. As I say, we are keen to use both at the right moment and I think the key is the value add. We are outcome-based in terms of how we put solutions together, so we actually start with what do we think a cautious client wants.
And so for our cautious solution, we think most cautious clients would want, say, 7%-8% per annum on a rolling five-year basis with bond-type risk. So, for us, that means you have to be very broadly diversified, if you believe in modern portfolio theory. This means getting into more complex areas that are often difficult for the IFA to access, areas such as commercial property, commodities and hedge funds, as well as equities and bonds and cash.
We run a multi-asset cautious managed fund, diversified across six asset classes, to deliver very steady rates of return. Happily, over the long term we have done very well with that, we are number one over five, four and three years, and we are top quartile since we arrived at Scottish Widows.
The other fund we run is an active managed fund, which is purely an equity solution. This is invested with absolute-return-mindset managers, managers who if they do not like a sector or a stock do not buy it. The key is the value delivered over the longer term, and we have the best risk-adjusted numbers in the Active Managed sector over three years.
So in both the cautious and the active space, against long-only managers as well as multi-managers, we have actually delivered some reasonable value.
MW: You brought up the point that multi-managers use some quite niche asset classes that might be difficult for an adviser to access on his own - do you see that as a benefit of outsourcing, or are you perfectly capable of getting access to the different asset classes you feel your clients need?
JN: I do not think we actually have a problem as financial planners accessing most asset classes now. What is interesting is that diversification and asset allocation became a big thing after the tech crash, and given the first real test of it, which has been the last 18 months, diversification has not really paid. The only real diversification that has helped clients is to have on the one hand your equity exposure but then your high-quality fixed income. Now investing in hedge funds has not really worked for most people, investing in commercial property has not really helped most people, investing in private equity has not really helped most people. So I do not see it as a huge issue for us. If we want to get into those asset classes, we can - there are lots of commercial property funds out there now, there are lots of private equity funds out there, there are less hedge funds than there were six months ago, thankfully. But, if we want those we can buy them.
Having said that, where I would agree with Mark is that as advisers we probably are slightly unusual in that we do come from a stockbroking background, we are more investment specialists, whereas that is not the average IFA. The average IFA is more about products and they are more about making sure you do your Isa, making sure you do your pension, which is extremely important, but they do have less experience in investment due to their background. So if they want those asset classes, they possibly wouldn't know the best ones and wouldn't know how to go about it. So you would need to outsource those decisions.
MW: That is a good point to consider - the size of a financial advisory firm and its research capabilities…
GR: IFAs have to spend a lot of time on investment… There are the compliance issues that we mentioned before, and TCF. Plus they have got to see clients and give the financial planning advice and then try and monitor the investments. Now is probably a good case in point - if they have got clients who have been invested in cash or have been avoiding equities, is now the time to get into the market and, if so, how much? The IFA would then have to do a letter to all of their clients suggesting a switch into a particular asset class, that client then has to sign and return that, then the IFA has to send the switch form to the appropriate office. That can take two, three, four weeks and what happens if people are away, what happens if clients do not reply, do you then do a chaser letter?
So, it can be quite a difficult process and I think that is where we can help. As well as fund of funds or manager of managers. All of those areas can assist IFAs to come to investment decisions, as long as the IFA is overseeing and monitoring what is going on and is fully aware of what those positions are. That can release more time to concentrate on those financial planning issues and give that valuable advice to clients.
AF: It is perhaps a good point to insert here that our cashflow reflects very much what the panel has been saying here in the sense that right now the number one fund, unsurprisingly, is cash followed by the multi-asset class funds, particularly our internally managed funds run by Swip, and then the external multi-asset class funds from Newton and from Invesco Perpetual. And I would suggest that that is not unusual. I think if you looked at some of our competitors you could broadly see that experience.
JN: Do you think there are too many fund of fund managers out there now? Because the number of launches over the last seven years has been incredible. You guys can manage cost - you are big, you have scale, but there are an awful lot of fund of funds managers out there which, to me, it can't make sense.
AF: You are absolutely right. There is over-capacity. And right now we are faced with a situation where we have to close two multi-manager funds, which has been forced upon us because the particular company concerned is exiting from the marketplace. But that said, it has not stopped us investing in real quality, and we have brought Mark's team over from Cazenove because we do recognise that this is something that is a medium- to long-term play. Over the short term, I would expect to see further shakeout, because there is over-capacity.
MW: That is a good point. The idea of multi-manager is that you have a manager choosing from the many funds or managers available. But if you get to a certain number of multi-manager funds then the choice of the multi-manager become as difficult as the choice of the individual fund was before. So does consolidation make the adviser's life easier?
DW: I do not think it will make a vast difference. Yes, if the universe shrinks then it could be slightly easier, but I think it just involves having an investment research process that allows us and, of course, discretionary, fund of fund and multi-managers, to make informed choices about the manager that they ultimately select to trust and invest in long term. The other thing about the industry is the level of turnover - within teams and within fund managers, that is a perennial problem and getting to the heart of that is critical in my opinion.
MW: So do you feel that, using this kind of approach, you still have as an adviser quite a lot of research and responsibility?
DW: Yes, absolutely.
GR: This is the difficulty for many IFAs - finding the time to actually do all that research and investment analysis. It is a tremendous expense, both in terms of employing suitable individuals to do that research, in the technology and in the actual time of putting all this together. It is quite a cost to the IFA business to put that in place. Clearly you have already got that sort of result within your own firm, but how much do you reckon that has cost you?
DW: I would say 50% of the administration cost is invested into that. And, as you say, it is not for everybody. And, indeed, even when you have that, you still may not have the expertise to provide the client solution and then you do need to go outside to find it.
MW: The industry is - although we are all trying to move away from it - still fascinated with the initial selection of something, be it a product or fund, or asset type. The next part - and this is where the FSA is trying to get people towards - is that it is an ongoing process. After three, six or 12 months or a period of years, is the solution you have picked still meeting what you are trying to do? That is where the IFA's role might be evolving. If they do not have the capacity to make investment selections or the resource, they are tapping into that [outsourcing] but their role then is to be sat on the same side of the table with the client.
GR: I think there is also a dilemma for many IFAs in that, they believe that by charging a trail commission - and most IFAs want to take a trail commission to ensure the future viability of their business - that they should actually be selecting the underlying investments. This is because the trail commission relates to the investment. My belief is that the trail commission is to pay for the ongoing advice, assessing changes in legislation which can affect high-net worth individuals.
JN: We do not take trail from anyone, we charge fees. Occasionally it does work out better if you are arranging a product to take commission but that just goes back to the client. I come back again and again to cost, because I think cost is critical in this equation. I do not know off the top of my head what the equity risk premium is at the moment, but the long-term figure is around 4%. Now, if you give the active manager the benefit of the doubt and say he can outperform consistently, give him 5%. But the whole portfolio is not going to be invested in equities, so say a third of the portfolio is in fixed income, and that takes the return over the risk-free rate down to 3.5% from the 5%, you then take off costs. That 3.5%, take off 2.5%, it goes down to 1%.
That is comfortably over 50% of the reward for investing in the stock market that has gone to the money manager and the distribution channels. The retail client does not get a lot of the cake at the end, and it does beg the question, why take the equity risk at all? And it comes back to your point, Mark - I agree with you - if you are going for active management, you have got to go for managers who have conviction, who are not going to hug the index. Most managers hug the index because they are worried about their jobs - it is as simple as that.
But, if you take a small IFA firm with, say, £100m of assets under advice, the cost of our index funds, they are all institutional share classes so roughly 0.3%. And I'll be very, very generous here and I'll say that the active manager will only cost 1% more. Now, on a £100m client base, that is £1m of cost. I would prefer that to go straight to the clients.
MH: I think the obsession with the cost is the wrong obsession; the obsession should be about value delivered. Odey is up 92% and the market down 14% since 2001 - you would have been down 15%-17% in an index tracker over that period. The problem with averages and statistics is that you can bend them any which way you like. If you look at the Blackrock UK Absolute Alpha fund, last year it was up just over 1% with a market down 32%. We are up 27% in the last five years, the average fund is only up 9% in the Cautious Managed sector and there are some funds that have lost money over that five-year period. So I think you have got to be very careful with this obsession about cost, because really it is about what can be delivered to the client at the end of the day.
Fidelity did some research in the 1990s across all of the IMA sectors, which actually suggested that in every sector, over 10 years, it was the most expensive funds which delivered the most value. So I think you just have to be careful with statistics, and if we just look at the States for instance, it is the most efficient market and is the most difficult market for active managers to add value.
MW: Mark, you have been in the multi-manager industry for quite a while, if you could give us an insight into how you have seen it change and the direction of the new fund launches - where are the areas that seem to be going towards the multi-manager solution?
MH: There has been a very significant change. It is easy to forget multi-manager is still quite a new industry. People do not come into the investment industry, train at a college and become a multi-manager. So it is still quite a young industry. It is evolving very quickly in terms of shape of product. I think with Ucits in 2005, with the flexibility that brought in terms of solutions, it has meant that multi-managers have been able to deliver solutions which I think are more suitable for clients. There is more of a focus now on absolute return, which is what I think the majority of investors want - consistent absolute returns. I do not think they have such a fixation on the equity market that perhaps we as an industry typically do.
The changes you have seen are solutions in the multi-manager area which are more broadly diversified, that are invested in more complex areas - not all IFAs can assess hedge funds for instance, they do not have the access to the managers. I think also with more complex products coming to the market - where managers can go long and short - the due diligence on these solutions is more complex and I think it is key that the people assessing funds are both trained as investment professionals, who are doing detailed and ongoing due diligence and are specialists in their areas. One of the things you will see from multi-managers is more specialisation and a broader coverage both on and offshore, and the use of different types of instruments.
So again, the point is not just about the asset class but also the method of delivery. Whether it is an absolute return equity fund, some sort of passive vehicle or an active fund, I think there is a tremendous amount of change going on and you need to be flexible and pragmatic in your approach.
MW: Long term, multi-manager has delivered strong results, but what about other things that clients need, perhaps like taking an income?
MH: I think with funded solutions it is more difficult to deliver an income, and a high income. Most funds do charge their annual fees to income, so the net income to the client is lower than it might be if you took a discretionary fund manager approach to deliver higher income. Perhaps you can tailor that solution in a more suitable way than you can from a fund, which is specific obviously to one mandate rather than their specific circumstances.
GR: That is a good point, because the vast majority of business we do with IFAs tends to be Sipp-orientated, and as those clients move into drawing an income from that particular product, we are able to work with the IFA to provide that targeted income solution. Also, within the retirement account/Sipp product, we can use more instruments to help to provide that income - not only direct investments, but things like structured products. With structured products we can take on all the counterparty risk, which would be difficult for an IFA to research. Also, we are never locked into those structured products. Although they might have a five-year term we can come out of those whenever we want. So we have a lot more instruments at our disposal to help provide that income solution for that particular client from their retirement account.
AF: If I could just pick up on some thoughts from what Mark was saying there. I think the extent of the due diligence required today is one of the key things that has changed over the past 10 years or so, and it is something that we take very seriously. The people who lead up my team in this particular area are Chartered Financial Analysts or moving towards it - that represents an investment as far as the business is concerned. When Mark is talking about wider investment powers, we do have to make sure that the managers are doing exactly what they are supposed to be doing, and that requires industry investment professionals to do that. This is a significant change that is certainly come in the past five years or so, and I would certainly expect it to continue going forward. It does represent an investment for us, but one we are happy to make.
MW: I am interested to know how far the panellists think that outsourcing can go. Is there going to be another innovation that will give more choice or do we have the system in place now and it is just a matter of building on it?
AF: I do not think we are at a crossroads in terms of would there be a retrenchment back to guided or would there be this onward and upward march to all things open. If there was another significant shock, if the markets did return to the state that they were in during Q4 of last year, then I do think that would give outsourcing or delegating a real impetus because intermediaries would think it is getting even more challenging. I do not envisage that there will be this fantastic march to open architecture, but the pressure on the distributor will be to provide choice absolutely at the heart of everything that we do.
GR: Many clients and IFAs have had this buy and hold philosophy - you build your asset allocation, you select your underlying investments and perhaps do the occasional review when you see the client again maybe 12 months later. And what was demonstrated in recent times is that the markets can move and do move very quickly. The ability to be able to move quickly with those markets is something that by outsourcing or delegating is done on the IFA's behalf.
MW: How much time do you need to spend with clients explaining what the different options are? Does the 'average Joe' client get what you are talking about when you discuss the options?
GR: Obviously every client is different and some clients are more technically aware about financial planning issues, but what we all want is for the client to have some understanding of what he is trying to achieve and how much risk he needs to take to achieve that. I think there is quite an important issue here - if the client's looking for a 10% return, then you have to say that to get that 10% return, you have to take this level of risk and the choices are you either accept a lower rate of return or you accept that risk level.
One of the things that we have found that we can help IFAs with is to assist those clients understand what those levels are. It can be challenging for IFAs, when you think about a pension product and the legislation, and whether you buy an annuity, etc. - there is a lot of challenging information to get across from a financial planning point of view, and then to implement a plan underneath it can also be quite challenging when you are talking about risk and different asset allocation and asset classes, etc.
One of the ways that many IFAs deal with it is to split that up - the IFA concentrates on the financial planning issues, then they assess which is the most appropriate route for the investment. If it is discretionary fund management, then get us involved. We encourage IFAs to come in and do due diligence on us. They can meet our research team to understand the process, which should give them the confidence to outsource. The IFA's role is then to oversee the investment and to keep us informed of any changes in the clients personal circumstances.It is very important, the ongoing contact..
JN: I think the point Glen made is absolutely spot on. Dealing with clients is very time consuming and the important thing is that at all times you understand what a client wants and what their objectives are. And sometimes the client will not know what their objectives are and you have got to work it out with them, you have got to help them through that process. For that reason, outsourcing is a trend that we are going to see increase and increase, because I do not think most firms will have the resource to do everything. From a compliance perspective as well, you have got to have very good systems in place if you are making investment decisions for clients, and that is something that a lot of IFAs simply won't want to do. So outsourcing will increase, and the regulator is very keen on us having robust systems so yes, regulation is pushing it that way.
MW: I think whatever the choice an IFA makes, the important thing to remember is that the reason that they will continue to be in the position they are in is because of their client relationship skills, by and large. They are faced with umpteen decisions on how they take their service proposition forward at the moment, far too many unfortunately. One of those is investment process. If they choose to outsource that, it is important they know the degree to which they are outsourcing, which duties are theirs and which they have pushed elsewhere. But a thing we haven't touched on is perhaps the feed of information. For example, if you work within a Sipp, you have access to a discretionary fund manager - you have brought another third party into play. With regards to the client being seen regularly, if that feed of information between the parties is poor, the service experience will be poor.
The IFA has lots of decisions but they are also in a good position because there are a lot of strong propositions to choose from. What they need to do is, when they are sat alongside the client, make sure that that experience is a good one, and if the multi-manager or the DFM is someone who can help them put that in place, then that'll lead us to the professional place that the regulator would have us be in a few years' time.
MW: Do you feel regulation is pushing you towards outsourcing more?
DW: You have the responsibility through regulation to put as much effort into the research of your discretionary fund manager as you do the individual fund. It is going to take less time though, because you do it once, you do it thoroughly and you do it on an ongoing basis. If you are looking at all funds, across all sectors or countries, it is going to take much longer. I do not think we are being pushed in that area, I think it is just about if you do not have the skill within the IFA firm to meet the client needs, then you need to create it, otherwise go to a third party.
Just picking up on the point that the whole client experience is dependent on the interaction with that third party - that is extremely important. You may have a relationship jeopardised if the communication or reporting is not as you want it to be. These are administrative points which you have to be extremely careful about and if you have it within your firm, it is easier to take corrective action.
AF: There is the common theme here but we are looking at it from a slightly different approach. With the outsourcing arrangements that we have in place currently, we closely monitor what the outsourcer is doing for us and whether or not, increasingly, they are fit for purpose.
GR: I think it is a very important point because, from a compliance point of view, it is not only important for the IFA, it is important for us as discretionary fund managers, fund of funds, manager of managers - we all have these compliance issues, and rightly so. And we all take those very seriously.
AF: Yes, there is an extent of due diligence that your firm went through, and we apply that to all our external relationships. The key task of one of our teams is to monitor exactly how these firms are performing, and a discretionary fund manager would be no different in that regard.
MW: Alasdair, how do you ensure that you are giving the right information and the right type of information to the IFAs who use your service?
AF: We monitor very closely our fact sheets and key information such as TERs, which are increasingly causing us to look more closely at how they are disclosed and calculated. Our actuarial colleagues follow guidance note 22 in terms of the TER calculation, which is undertaken on an annual basis. My team will check about 850 fact sheets, and over and above that we have an audit process built in.
So we are acutely aware of the responsibilities when it comes to Scottish Widows data - it is our data and we take that very seriously. I think the other area in terms of value add, and one of the key things which has developed since the credit crunch, is the degree of control that we are applying in terms of operational efficiency, particularly in relation to the pricing of our funds both internal and external. This means having a fair value pricing policy in place for our external funds as well as our internal funds.
It means in terms of value add, we monitor the external fund links we position in the marketplace with the underlying fund links to make sure that they are broadly in line. Tracking error is something that we are obviously aware of. So the spotlight is on improving our control and operational efficiencies, and that is something we will continue and we take very seriously indeed. TCF is at the heart of all this.
MW: Mark, do you feel extra responsibility as a multi-manager to give information to the IFAs using you, more so than as the manager of a single-manager fund?
MH: One of the keys for us to join Scottish Widows was to join a group which has representation on the ground, that has resource to provide information electronically or over the telephone. It is absolutely vital that there is regular information, there is regular contact - the relationship is almost as important as investment performance itself. So even when performance is good - and particularly when performance is not so good - the IFA and their clients need to be aware of what's been going on. And it is vital as a multi-manager to be with a group which is able to deliver that information in an accurate and on a regular basis.
