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Five years of using DFM run risk-graded model portfolios

Almary Green has been running six risk-graded model portfolios since 2010. It uses four DFMs to manage the portfolios and is currently looking for a fifth manager. Managing director Carl Lamb believes all adviser firms will eventually turn to this way of managing client money

Carl Lamb, managing director of Almary Green, believes the use of model portfolios will grow in popularity among advisers, as an effective way of delivering risk-graded investment solutions to clients.

The Norwich-based firm has been using model portfolios for over five years, believing that as an investment approach it is “the future” for the financial advice market.

Lamb says: “The financial crisis highlighted how little control people had over their money, yet client risk and tolerance for loss is of utmost importance and I think any IFA setting themselves up as a fund manager is setting themselves up for a fall.”

It was in March 2010 that the firm researched changing its process from one where Almary Green made the full selection of investments, to an outsourced arrangement, where the investment decisions were made by a discretionary fund manager running a range of model portfolios to cover the varying risk profiles of the client base. The research pointed to it being the way forward for the firm but before it could implement that level of change, Lamb says, it had to get the buy in of its client base.

Almary Green initially drafted a document for clients explaining model portfolios and how they worked and, Lamb says, the client base universally welcomed the decision.

“I sat down and had very honest and open discussions with my clients. The reaction was extremely positive – in fact, I’m yet to come across a client who doesn’t see the benefits of using model portfolios,” he says.

Six portfolios

The firm has around 150 clients and £100 million in assets within its six risk-graded model portfolios covering a range of risk profiles from cautious to adventurous. Clients are required to fill out a detailed risk questionnaire and they will remain within their particular risk rating until the firm is satisfied that they can be moved up or down the scale.

The value of the portfolios has been clearly demonstrated over the years when markets have fallen, Lamb says. “Under the traditional model of advised investment we would have had to write to all our clients regarding the action we were recommending them to take and hope to get replies before we could even attempt to address the issue of market volatility.”

Being able to rebalance the portfolios not just on a quarterly basis but more often if market conditions dictated, has presented real-life, tangible demonstrations of why the firm was right to go down the DFM route, Lamb says.

For example, in 2011 around the time of the Euro Crisis, the firm was able to quickly react to the surprise fall in the markets. More recently many of the lower risk profiles have contained gilts, which Lamb says have performed surprisingly well despite being thought of as a pedestrian investment.

From one to five DFMs

Initially the firm used just one discretionary fund manager (DFM) Principal Investment Management, linked to the Skandia Investment Solutions platform.

The firm currently uses a panel of four DFMs: Vestra, Brooks Macdonald, Bordier & Cie and 7IM. It carries out regular reviews on all four companies, and is in the process of looking for a fifth.

Every quarter Almary Green’s investment committee members meet and go through the numbers and performance and once a year the firm sends out a full due diligence questionnaire both to existing and prospective DFMs covering experience, personnel, services available, portfolio construction, risk management and monitoring, compliance and fees.

Lamb says: “Of course, you need to consider all the usual things such as performance and whether they have a good track record, but dialogue is also key. For me it’s a two-way partnership and even though it’s outsourced, I still want to know we are working as a team to ensure the best outcomes for clients.”

The firm recently changed one provider, believing its was “no longer the right fit”. Finding a replacement took around eight months and saw the firm whittle its options down to five front-runners. It eventually selected Bordier & Cie.

Lamb believes his decision to use model portfolios has not only helped streamline the business but it has improved its internal processes also.

“I believe we absolutely made the right decision in moving to model portfolios. The results have been really good and I expect it to become more and more popular among other IFAs,” he says.

Visit the Almary Green website

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