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Centralisation: the fit for purpose and bespoke tightrope

by Eleanor Lawrie on Feb 04, 2014 at 11:22

Centralisation: the fit for purpose and bespoke tightrope

Wealth managers are under growing pressure to demonstrate they have a repeatable and consistent investment process, but most importantly client portfolios that are fit for purpose.

The retail distribution review, coupled with the 2011 suitability review, showed a portion of the wealth management sector was struggling to demonstrate the suitability of client recommendations and internal safeguards and controls to the regulator.

As a result, a growing number have centralised investment processes. However, there is a risk this strategy can leave individual investment managers feeling their decisions are no longer vital in shaping their clients’ portfolios.

Catherine Tillotson, co-founder of consultancy Scorpio Partnership, says the process of centralisation has had a mixed effect on the wealth management community.

‘This has been a long-term trend for a number of reasons. It has the potential to improve quality, with everyone getting the best ideas and not relying on individual managers, and it’s a way of supporting segregation to get the right stocks for a whole group of clients,’ she said.

‘It’s also cost-efficient if you are bulking up on trades as it reduces transaction costs, so there are lots of arguments for consolidation,’ said Tillotson.

She adds, however, the ‘negative argument is that clients do not get individual services’.

Shift to centralisation

Tillotson notes there has been an industry shift towards centralised strategies over several years, with regional branches now less likely to offer stock picks of individual investment managers. The trend has led to investment processes becoming more uniform and less esoteric.

Tillotson says in some cases, these individual selections could be replaced by a multi-asset fund, which if relevant for a client’s needs should be seen as a valid alternative because of the lower costs involved.

Centralisation can be implemented in numerous ways, whether through a central office that controls key investment decisions, a research team that comes up with best ideas or by the use of standardised portfolios with strict turnover and asset allocation parameters.

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1 comment so far. Why not have your say?

Robin Kent

Feb 05, 2014 at 17:07

The centralised investment process (CIP) is no panacea, raising the risk that all clients do badly in the event of poor or 'unlucky' investment choices.

The FCA seems to have become confused, failing to grasp that some firms are structured as employers of fund managers, facilitating their business and others are structured as a fund manager employing relationship managers. Both models are viable provided sufficient risk controls are in place.

In expressing a preference for the latter the FCA ignores the risk that a firm will eventually fail precisely because its CIP fails to deliver. Customer outcomes will be similar - but unwelcome!

Besides which, wasn't it banks and dodgy overseas investment schemes not fund managers that got into trouble?

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