Renaissance - Redefining Research

This is the final article in the series providing ideas and thoughts for advisers looking to design, build, or run a Centralised Investment Proposition (CIP) or Centralised Retirement Proposition (CRP).

This article looks at documenting your CIP / CRP, thoughts on platforms, and the role of an investment committee.

Documentation requirements

It is a daunting prospect, when faced with over 9000 instruments in the UK (OEICs, Unit Trusts, ETFs, Investment Trusts, VCTs etc), to work out where to start with due diligence.

Having already completed a client segmentation exercise the task should start to become clearer. For example, if most of your clients, or a segment of them, are relatively unsophisticated investors who seek comfort from coverage by the FSCS - it is possible to screen out whole categories of instruments that do not offer that protection.

If keeping costs below a threshold is a key element of your philosophy, there again, many hundreds of more expensive investments can be screened out.

This "screening out" approach is a great first step - it effectively removes potentially poor products (outcomes) and thus leaves only good ones.

In simple terms if you screen out products that are likely to deliver poor outcomes you must be left with a subset that will deliver good outcomes!

Due diligence process - example

Link to your philosophy

This process can be used to further screen out products that fail to meet your criteria for each segment. For example, if you have a tier of clients with smaller investment amounts, it may be most effective for them to be offered a multi-asset solution. Single asset solutions would therefore be inappropriate. Further screens might include fund size, and alignment to the risk tool that you are using etc.

The key is to start with an open mind, use the needs of your client segments and the beliefs articulated (and evidenced) in your Investment Philosophy to screen out products that are less likely to deliver good outcomes.

Evidence

One of the key aspects that emerges from FCA comment on due diligence is the issue of status quo bias. In simple terms, it is just using the same approved list as last year without really challenging your assumptions. The difficulty is keeping the approved list up to date without the mammoth task of screening the whole universe every year or so. The screening out process above simplifies this by allowing you to remove whole categories that are not suitable, and thus focussing effort on selecting (and updating) from those that are.

Keeping a simple log of the process and outcomes allows you to satisfy the FCA, but most importantly shows your customers that you have a robust and independent process for selecting solutions. And, of course, this is a very valuable process for customers. The time it would take each of them to shortlist and screen the investment universe is substantial - and thus a key element of your value is the time it saves them.

Wider investment solutions

Of course, the world of investment solutions is much broader than just funds - model portfolios and bespoke mandates have exploded in popularity over recent years.

But the same approach – linking to client segmentation needs and adviser investment philosophy is key. If your philosophy leads you to passive solutions, you can screen out active. If cost is an issue, then it is likely that MPS could be more effective than full bespoke DFM (but depends on scale and mandate required). If adherence to a risk profile is important, then understanding how the mandate will be run is key. If you are interested in active managers, then a comparison of risk adjusted returns compared to a consistent benchmark (ideally the adviser's chosen one) will be important – probably over several time periods.

Again, screening out those offers that do not meet your criteria from the wider market is a sound and time effective approach. Or use an external research firm to do this work for you.

Platforms

A similar screening out process using customer needs and your investment philosophy and process can be equally applied to platform selection.

FCA perspective

The FCA issued Factsheet 12 on using Platforms some years ago - but it is one of the simplest and most helpful guides they produce - well worth a read (and reflection).

The key areas that you might consider when conducting platform due diligence (and sources of data) are:

This will allow a short list to be created which can then be validated and refined with a Due Diligence Questionnaire (DDQ) to each platform.

Investment Committee role - challenge the status quo bias

One key element of any CIP is the documentation, recording and challenge that it requires. Smaller firms will find that simple minute-taking and diarising reviews will be sufficient. Larger firms and those with discretionary permissions will need more formal reporting and MI. One important role that an Investment Committee can fulfil is to challenge the CIP and its assumptions / outputs. The Investment Committee also needs to guard the firm against "shoehorning", whereby clients are squeezed into the available solutions rather than a solution being provided for their needs. External compliance or consultant support may be useful to bring in fresh ideas and thinking.

Simple agendas, well thought-out reports and good minute taking will provide for quality meetings, discussion, and reporting. Bringing in your preferred managers or platforms to present (against your agenda) may also provide quality oversight.

In some smaller firms that we have worked with, a quarterly committee that rotates the agenda round key areas has worked well e.g.,

• Q1. The CIP.
• Q2. Platform DDQ / PROD update.
• Q3. Managers and DFMs.
• Q4. Risk tools / Cash flow / FCA & Compliance.

Below is a simplified list of the key areas that an Investment Committee Terms of Reference might include:

• Membership: usually agreed by the firm’s governing body.
• Attendees: who attends / quorum etc (and the fact it may call fund managers / providers to attend from time to time).
• Role: who the Committee is accountable to, what role it provides (oversight of the investment activities inc. risk profiling, manager, and platform selection) and what reporting it produces (good MI and audit trails are important).
• Responsibilities: for example:
  • Agree, develop, and provide oversight over the investment process.
  • Approve any changes to the investment process.
  • Determine the strategic and tactical asset allocation for the models.
  • Review the risk profiling tools and asset allocation outputs.
  • Agree any external inputs required for the asset allocation process.
  • Critically review the output of the research and due diligence process.
  • Develop and monitor the training of advisers / staff.
  • Agree the approved instruments list.
• Information: What information and reports the Investment Committee will be provided with, and what reporting it will provide. This might be simple minutes in a small firm or more formal board papers in a larger organisation.

The value that you add

There are many areas where advisers add value, do not forget to remind your clients of these. Some examples below:

Creating an accurate risk profile – allows you to design a portfolio that meets the needs of your clients – and delivers long-term security.

Having a robust process – helps keep your client on track and avoiding the classic mistakes that many investors make – these mistakes could cost them 2% a year.

Screening out the poor products (from the more than 9000 available) means clients will have only “good” outcomes in their portfolio – saving them time and giving them confidence that their plans will be realised.

Diversifying your portfolio – spreading their investments across assets, funds, managers, custodians – all help reduce risk.

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Email: advisersupport@tcfinvestment.com