There is no doubt that there are distinct advantages for advisers in outsourcing investment management on behalf of their clients. The ability to focus on the markets and sift through extensive research material is clearly a full time job. Other key considerations are:

• Any organisation with more than one adviser begins to face issues regarding consistency of advice and investment allocation provided to clients of a similar risk profile.

• Outsourcing of the investment management process can also exploit efficiencies and economies of scale.

We expect that the drive to RDR will distinguish between outsourcing investment management and continuing responsibility for investment strategy or asset allocation. The adviser is in the fortunate position of holding the keys to the client relationship, through the risk profiling process and providing the all-important investment advice.

As a result the client will always look to the adviser for investment performance. An investment manager may let you down but you allocated the funds to him in the first place.

If you are aiming to develop the client relationship as the value added component of your business model, you by default are going to be assigned the responsibility for asset allocation at the broadest or highest level.

With this in mind we think that there are a number of factors to consider as you establish your RDR business model and processes.

1. Fees eroding performance

Outsourcing clearly introduces additional layers of management fees and transaction costs to the process. You must be sure that these fees provide value. Accordingly, it is important that you look closely at the cost structure built in to the outsourcing of the investment management process.

2. Active management

There is a risk in diversification through multiple fund structures that you water down the results of active management to achieve those of passive management with the residual burden of higher fees and transaction costs.

3. Suitability and Timing

Your selected investment manager is trusted to invest client money with a focus on defined markets, sectors or business types. The strength and weakness of this approach is that they will carry on regardless. I should know I have been waiting for the Nikkei Index to recover for over 20 years and still keep putting the money in “doubling up” and buying “at the bottom”.

After all of this you still have the responsibility for the investment strategy and initial asset allocation. We believe that post RDR and the transition to adviser charging there will be a distinct polarising of the outsourced relationship and your role to monitor and account for their performance.

Three Components of Advice

You will be directly responsible for profiling the client effectively and identifying an appropriate tax efficient investment vehicle. The component that compliments these two tasks is securing investment performance through the initial asset allocation and subsequent rebalancing of the client portfolio.

As you are driven to act more decisively for the client you must critically evaluate both historical performance and just as importantly the potential for future performance. This leaves you with an obligation to manage the manager and retain responsibility for the strategic asset allocation process.

Our Contribution to Your Solution

We are advocates of an “evidenced” approach, to benchmark or consider the more subjective arguments presented by active and to a lesser extent passive investment managers.

Creating a formal investment review process is vital in assessing the effectiveness of the strategic asset allocation process. Points to consider are:

• The outlook provided by the investment manager;

• The range of the investment universe available through the outsourced structure;

• The evidence in support of the investment manager;

• The ability to act decisively between receiving manager updates;

• The negative effect of fees and costs on investment performance.

We provide independent analysis of asset classes, markets and industry sectors so that you can consider all of the above factors in an objective and timely matter. We are convinced that the ability to act decisively through asset allocation to preserve value and capitalise on opportunity, however small can have a significant long term effect for your clients.

Keith Reid
Keith Reid
Keith’s training as an accountant and auditor has emphasized the importance of evidence in all good decision making process. The ability to monitor management processes effectively is a key to making the most of business opportunities. Both Keith and Gerry believe that this priority for capital preservation is the common principle that sets the framework for any sound investment strategy or business model.