The Importance of Monitoring Investment Performance

The large fines recently imposed on Martin Currie for their failure to effectively manage conflicts of interest are worth noting for anybody involved in the business of providing advice and allocating assets. Details of the transgression and the results are HERE

As we read about the incident that resulted in the fines, Martin Currie appears to have identified the conflict of interest in the transaction that they structured, only after the event. This led the company to unwind the matter with compensation to the client involved, along with substantial restructuring of their investment oversight processes.

Have you taken steps to enure that your investment oversight process is effective for your client purposes?

Martin Currie have to be commended as they raised the matter directly with the FSA and due to their level of cooperation and willingness to resolve the matter proactively, they have been able to reduce the value of the fine considerably.

A painful lesson for Martin Currie and a reminder that oversight of asset allocation processes should be effective and as close to real time as they reasonably might be. It is not clear how long the transaction was in place before it was highlighted but it resulted in compensation of £12million being set aside for the client involved. If you are considering outsourcing your investment management process it is vital that you actively review the continued suitability of each investment for your clients.

Centralised Investment Propositions

Following the FSA paper last month which we referred to in our analysis of Centralised Investment Propositions here, whether you act as an investment manager or outsource your asset management, as an adviser there are two distinct risks that might accrue over time and under the radar:

  • There is great potential for the “risk alignment” of a portfolio to vary either as a result of the changing needs of the client or less visibly as a result of increasing price volatility in your selected asset classes or markets.
  • Equally, the strategy of your chosen fund can be subject to “portfolio drift” through changes in the nature of investments within the focus of the manager or changes in personnel at the management company.

It is important that you keep an eye on these factors over the life of the investment. Failure to spot a point when the nature of the investment has fundamentally changed for the client could lead to a situation where seemingly unimportant changes in the profile of a Fund ultimately lead to a penalty because the investment is no longer suitable for the client and may not have been for some time.

Your first responsibility is to demonstrate that you have a process in place to actively monitor continued client suitability. The next step is to know what risks you want to address, such as risk alignment and portfolio drift.

Our Heatmap and TACT reports provide the ability to proactively consider the effects of price volatility on a client portfolio along with the strategic focus of its investment manager and might at least alert you to take sensible steps on behalf of your client at an earlier stage in your relationship.

At the moment and specifically when the fund manager has no direct relationship with the client, you are the lynchpin to ensuring that the risk alignment and portfolio strategy of the investment are suitable for your client. Clearly, nobody benefits from lapses in oversight or the inability to appreciate changes in risk levels through price volatility or investment focus.

This will be increasingly true if the investment manager, whether it is a DFM or DIF structure, is drawn in to tripartite management agreements. In these circumstances you and the investment manager have a common interest in monitoring and managing risk alignment and portfolio drift effectively.

As RDR defines your responsibility more clearly we believe that the ability for you to communicate your client needs with the investment manager will go a long way to maintaining client suitability over time.

What does this mean in the real world? There are some basic questions that you should get in to the habit of asking yourself if not the investment manager directly.

  • Is the investment manager’s stated strategy consistent with the needs and objectives of my client?
  • Within the mandate of the investment manager is the shorter term investment focus still effective for the client?
  • Beyond the mandate of the investment manager has there been any significant change in the risk profile of the asset class, market or sector that they operate in?
  • As an alternative to the mandate for the investment manager are there more appropriate investment opportunities for your client?

In the past we imagine this scenario playing out between you and the investment manager with each of you talking at cross purposes.

My Client, Your Client, Who’s Client?
by: keithr9868

While it is in the land of cartoons we would like to see conversations between you and your chosen investment manager evolve along these lines…..

Our Client and Their Asset Allocation (Working with your Investment Manager)
by: keithr9868

It is important to us that as the adviser, you are able to discuss the elements that drive the performance of a fund.

  • What industry sectors has the investment manager chosen to focus on?
  • Are these sectors currently more or less volatile than average? How might this affect the Fund?
  • Has the focus of the Fund changed over time? Should the focus of the Fund change?
  • What might be appropriate alternatives for your client?
  • Most importantly what are the views of your chosen investment manager on these points?

Remember it is all about maintaining the correct level of risk and ensuring that the focus of the portfolio does not drift with out your knowledge and acceptance on behalf of your client. The impending changes and the knock on effects that they will have in the adviser industry will make the development of a robust approach to asset allocation a priority in the post RDR landscape.

You will increasingly migrate to a more clearly defined role of client agent in allocating investments to managers. However, a key element of these changes will be the need for you and your chosen investment manager to establish an improved line of communication rather than talking at cross purposes.

For a more detailed explanation on how Sinergi can assist you in the Cycle of Arranging and Monitoring your asset allocation decisions click here


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.