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.
Brooks Macdonald uses a centralised process, but gives individual managers responsibilities across all four areas: research, managing client portfolios, the client relationship and new business.
Chris Macdonald (pictured), chief executive of Brooks Macdonald, explained: ‘We have always had a centralised investment management process and we have an asset allocation committee that sits monthly or more often when there are sharp moves in the markets. We have always managed money around risk.’
He says there is consistency across different risk profiles but managers are able to apply a degree of ‘entrepreneurial flair’. He believes it is important to allow the investment team some discretion as they interface with clients and understand their individual needs and objectives the best.
Important to tailor portfolios
Hugh Grootenhuis, chief executive of Waverton Investment Management, says it is important to allow managers discretion to tailor portfolios to the individual needs and objectives of their clients within a robust framework.
‘We are bespoke and all our clients’ balanced portfolios will have different stocks in them because clients are different and they are run by different managers, they are not clones,’ he said.
‘We don’t wake up one morning and say “sell BP” and we all sell it. There may be 100 reasons why we don’t sell for a particular client, such as tax or income.’
But Grootenhuis insists that although the firm manages money for clients on a case-by-case basis, it has checks in place to make sure portfolios are fit for purpose.
‘We have a risk committee and a portfolio committee and we use software to track the positioning of client portfolios. We make sure there is not massive variance between portfolios, particularly in terms of asset allocation.’
The process tried to strike a balance, with managers allowed to deviate from set asset allocation ‘as long as the macro themes are consistent’.
Rowan Dartington assesses the risk profile and requirements of its clients and then provides investment managers with model portfolios as a starting point. However, managers can ‘tweak’ the models to better fit the clients’ objectives, for example by upping exposure to income funds. The firm opted to move to a more centralised framework in 2011.
Investment director Tim Cockerill said it was beneficial for both sides, as many clients were happy to be placed in a model portfolio with tailor-made alterations. It also made the process manageable for investment professionals in terms of scalability.
‘How many clients can you manage on a bespoke basis? There is a limit,’ Cockerill said.
The push towards centralisation may have been driven by regulatory pressures and a need to manage costs, but if the result is more consistency for clients, that is no bad thing.
Firms that offer their managers the chance to sit on research teams and customise portfolios within defined parameters also minimise the risk of alienating their staff while ensuring their experience and training is put to good use.