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Insourcing investment can keep you in control

Insourced investment solutions allow financial adviser businesses to retain control of the investment process, reduce costs to the client and levy a sustainable fee for their services, says Philip Bailey of Assetfirst

Most business owners would agree that their post RDR service proposition must be scalable and include a compliant investment solution which suits the needs of all clients (and all advisers for that matter). Much has been written about the suitability of DFMs, fund of funds and model portfolios but there is another, novel solution which provides the flexibility to cater for a wide range of clients, yet for a significantly lower fee. I’m talking about investment insourcing solutions.

Insourced investment solutions are a relatively new option, providing advisers with the intellectual property to create and maintain their own range of low cost, risk graded, multi-asset portfolios. These are backed up by in-depth economic and stock selection analysis from external professionals. This enables advisers to deliver a robust investment proposition to their clients for a fraction of the cost of running their own in-house investment committee.

Staying in control

In the case of our own Assetfirst service the financial advice firm pays a monthly subscription fee that is calculated based on the number of RIs within their firm, rather than the size of funds under their control. Importantly, the adviser does not have to pass their clients to a third party for investment advice and so retains their place at the centre of the client relationship.

Table 1 (below) shows the
costs and an assessment of the regulatory risks of the main investment options available. In each case adviser fees have been excluded and we have assumed that the adviser firm comprises three regulated individuals (RIs) and has £10m of client funds under management that are applied to the solution.

As can be seen from this table the lion’s share of costs borne
by the client is generated by the Total Expenses of the underlying funds. Of course, were you to add a 1% adviser fee to the fund management fees outlined below, the total annual charge faced by the clients could be anywhere between 1.45% and 2.94%!

In the post-RDR era of complete disclosure, clients may baulk at the higher levels of fees – particularly if returns are limited – and this may well lead to downward pressure on the easiest target, the adviser’s own annual fee.

Undoubtedly, a major string to the financial planner’s bow is the invaluable client work provided around cashflow modelling. The projected future returns figures assumed in these calculations can have a huge bearing on the projected outcomes for clients.

But how do you build a
reliable risk-graded investment proposition that can closely match these projections? This has always been a difficult issue and one open to conjecture, never more so than in recent years.

At Assetfirst, our strategic model portfolios are constructed using almost exclusively passive index funds for each asset class. Because of this, it is possible to back test each model over a long period (40 years +) and produce a meaningful guide as to the likely returns and volatility attaching to each portfolio.

By using passive funds it is also possible to ensure that there is no chance of an active fund manager making an investment decision that compromises the risk/reward integrity of the portfolios and invalidates the projections.

Plan accuracy

Of course, past performance is not necessarily a guide to the future, but by using fixed asset allocations to passive asset classes over a long time period, this type of investment approach should both improve the accuracy of the financial plan and increase the client’s understanding of investment risk whilst reducing the overall cost levels.

This information helps to remove the influence of short- term market movements from the planning process. When used in conjunction with a risk-profiling tool it provides a useful reality check; if the risk report says the client is balanced and your modelling says a growth rate of 6% is needed, then the back-tested returns help to show that the client should be able to achieve the required returns with a reduced degree of risk.

A financial adviser’s selection of investment proposition is complex but getting it right
is vital to their success in the years ahead.

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