As Andy Miller, Lead Investment Director at Quilter, explains, thanks to an evolving regulatory landscape and a changed investment outlook, the odds are increasingly stacked against advisers still building their own in-house investment portfolios.
The change from a world of low interest rates, low inflation, and muted geopolitical risks to a world of high interest rates, a cost-of-living crisis, and simmering international tensions has helped turn conventional investment approaches on their head in recent years.
Meanwhile, today’s regulatory focus, which requires advisers to be more proactive in the pursuit of good customer outcomes, has made life increasingly difficult for those advisers still offering their own in-house portfolios.
This shifting backdrop means many advisers now need to evaluate their existing investment processes. They need to recognise where the risk lies in their businesses, and how to manage escalating costs, while still improving their profitability and delivering positive outcomes for their clients.
Creating an efficient investment process
If you are still managing client portfolios, your first step is to establish an appropriate long-term strategic asset allocation. This requires in-depth analysis, research, and specialist investment tools.
The strategic asset allocation is the bedrock of investment returns for any portfolio, so finding that optimal mix of asset classes and investment styles is key to success. Once an appropriate investment mix has been decided, it then comes down to screening and selecting appropriate funds with which to populate each portfolio.
To withstand regulatory scrutiny, any investment process will need robust, repeatable practices in place to identify which funds, and which managers, are best-placed to contribute to your portfolio objectives. This is where due diligence will need to be evidenced as it’s the only way to ensure that the wrong building blocks aren’t selected.
The next step is portfolio construction. This means assembling the right constituent parts and instigating a process for tactical overlays that enables you to exploit short-term market conditions or to refine the overall risk levels of the portfolios as market conditions evolve.
Monitoring and oversight
Once you’ve constructed your portfolios, the requirement to continuously monitor and manage them kicks in.
This means identifying any changes to an underlying fund’s management team, its investment process, or its style bias. It also means dedicated performance analysis and a whole host of operational investment and due diligence considerations.
If you offer your clients in-house portfolios it comes down to managing two significant business risks:
- Your clients not being in the right investment at the right time.
- Being unable to demonstrate an understanding of the fund mechanics underpinning a portfolio.
Not being able to demonstrate an understanding of the funds in a portfolio can increase the chances of foreseeable harm for your clients. This is especially important in the context of the Consumer Duty world in which we now live.
The Consumer Duty challenge
The challenge for every adviser is to evidence that your business is actively looking to deliver the very best outcomes for your clients. From an investment perspective, this means detailing your investment process at a much more granular level than previously.
It requires advisers to report on any funds that have been added to, or removed, in the last 12 months. It also requires full disclosure of the governance arrangements that are in place.
