A desire to create better investment portfolios for clients is driving more financial planning firms to harness the expertise of professional fund managers to provide investment insights and portfolio construction analysis.

While product manufacturers grapple with the issue of producing solutions that meet the needs of the growing segment of the population approaching and moving into retirement, some planners are taking matters into their own hands.

And this is happening, supported and facilitated by organisations such as the Association of Real Return Investment Advisers (ARRIA), at a time when discussions around robo-advice is raising questions about the fundamental value of financial planning propositions that have at their core an investment solution.

James Walker-Powell (on the left in the picture), founder of the self-licensed financial planning business More4Life Financial Services, on Sydney’s northern beaches, says his advice proposition is built around five key areas of a client’s life: money, leisure, health, business and family.

“We built this whole process…and the missing piece or the last piece of the puzzle was the investment strategy,” he says.

“We experimented, mostly successfully. Some of the experiments weren’t that successful, but that’s fine. But I’m really comfortable where we are now.”

Walker-Powell says a tailored solution is better than anything that can be purchased off the shelf.

The bulk of More4Life’s clients range in age from roughly 45 to 55. Walker-Powell says his portfolios are designed to forgo some potential upside for the sake of protecting clients from the worst of the potential downside.

Walker-Powell says any adviser can seek to maximise returns, and do it cheaply. But that’s not what clients want.

The input of fund managers

“They are very happy to forgo any great returns for that smooth return,” he says. The input of fund managers into portfolio construction is critical.

“I don’t do it by myself,” Walker-Powell says.

“I show [fund managers] my portfolio and I say: give me a good reason why you should be in it. Every time someone comes to see me, I’m giving them the opportunity to [put their] case; but they’re basically doing my work for me – by coming back and showing me why [they should be in].”

A crucial part of the process is running the More4Life portfolios through Morningstar analysis.

“You can’t lie with Morningstar,” Walker-Powell says.

“What I look at is standard deviations, Sharpe ratios. This is a little office, so I’ll get everybody else to do that work.”

Walker-Powell’s portfolios have a modest exposure to equities – in one example, a balanced fund, it was about 16 per cent as at the end of March this year – and a relatively high exposure to alternatives and absolute-return strategies.

Matthew Newham (on the right in the picture), investment director of wholesale business for Standard Life Investments (SLI), says fund managers are only too willing to help financial planners construct effective portfolios.

“We’re there to do some of the grunt work,” Newham says.

Relationships evolving

The relationship between fund managers and financial planners has evolved beyond being one where a manager’s business development manager would only visit to drop off fund fact sheets and product disclosure statements.

“I think the industry is moving away from that, thankfully, and you’ve got to have a bit more substance in what you’re saying,” Newham says.

“People want us to look at their portfolios.

“It’s about getting some of the intellectual capabilities that we use…and not selling it to them, but showing them what we think. It’s changed a bit.

“[Financial planners] want to deliver their clients a stable, decent return, and not have the big draw downs that we’ve seen in the past, like the 20 or 30 per cents in the GFC, and to deliver a return of, let’s say, around 10 per cent, or cash-plus-5 [per cent], and to do it without the draw downs.

“They are prepared to forgo a bit of the upside to not have the draw downs.”

A significant part of this approach is rethinking diversification and understanding where risk lies in a portfolio, Newham says

“If you have a traditional balanced fund of 60 per cent equities, 40 per cent fixed interest and other, the bulk of the risk is still from equities,” Newnham says.

“It’s not a balanced fund. It’s something like 80 to 90 per cent equity risk. And there’s a growing recognition of that in the retail market; that what you’re really doing is punting on equities, with a balanced portfolio. You’re hoping that equities do well over time.

“There’s a recognition that when things go bad, all asset classes generally go bad together, as in the GFC when correlations went through the roof. The GFC taught us a big lesson about moving away from that traditional approach.”

Independents’ competitive edge

Newham says “smaller independent firms possibly have a competitive edge in they can move faster when changing asset allocations, they have a wider approved product list [APL] and can tailor more to individual clients”.

“Further, in today’s world, they have access to tools like the Morningstar portfolio construction tool that gives vital info such as returns of portfolio, standard deviation, Sharpe ratios, et cetera,” he says.

“Funds are chosen on merit, rather than other characteristics such as how will the fund fit in the vertical integration model of dealer groups who are owned by a bank.

“They also pull in the resources from the fund managers who wish to be part of the model portfolio.”

Walker-Powell says creating his own investment solutions is a point of differentiation from other planning businesses.

“It differentiates you, obviously, because you’re giving clients what I describe as a ‘new-age’ investment,” he says.

“You’re giving clients a lot more peace of mind. How can you say, “Look, mate, just hang on’? Wouldn’t it be fantastic to take that out of your life [and say] I don’t need to worry about what happens with investment markets?”

And there’s another reason why investment solutions created by planners have to be demonstrably robust and based on sound, independent analysis.

“There’s no way you can go out and say to a client, roll over your money from AustralianSuper to a wrap using ETFs,” Walker-Powell says.

“That’s a court case waiting to happen.”

Simon Hoyle is head of market insight for CoreData Research.
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