Choosing and Outsourcing an Investment Strategy

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Choosing and Outsourcing an Investment Strategy
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Agenda

• How much value clients place on investment advice
• Choosing an investment strategy to complement a
  planning strategy
• Whether investment outperformance should be the
  goal
• How much to outsource - the management or the
  process
• Creating Investment Solutions

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Agenda.

• NOT technical analysis of investment techniques
• NOT predicting investment trends
• A Strategic overview of what part investment
  advice plays within a new-model practice
• How Businesses should react to the trends

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Background

• Thinc
• 32 Acquisitions
• Segmentation into Transactional / Advice
• Highly Structured Client Value Proposition
• 662m Assets aggregated onto Wrap
• 1.6bn non-platform
• Working with FSA on DP 07/2 (Wrap Review) and
  featuring as Case study segmenting customers
• Sale to AXA
• Working with distributors and providers on
  Paradigm shifts

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IMA Summary of UK Domiciled Unit Trust / Oeic
Gross Retail Sales 1997 - 2007
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Asset Migration..

• The dominant channel in the gross sale of retail
  funds in 2006 was the intermediary channel. This
  continued to be driven by the growing influence
  of platforms and fund supermarkets, reflecting
  the ongoing disintermediation of the asset
  management value chain
• IMA Asset management survey 2006

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Future Trends

• Assets held on platforms are growing by 44 per
  cent a year and will reach 205bn by 2012
• 47 per cent of new money goes into the industry
  through platforms and this will grow.
• Platforms to diversify from the traditional IFA
  sector and increasingly tie up with retail banks,
  building societies and primary advice channels
  after the retail distribution review.
• More back-books of business will move on to
  platforms and boost inflows.
• Lipper Feri Nov 2007

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The Client Value Chain
Financial Planning
Risk Assessment / Asset Allocation
Investment Selection
Implementation
Source Telemaque, Australia 2005
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Client Value Perception

• The Creation of the Context within which the
  funds will be managed
• Detailed projected pl and balance sheet
• Analysis of future cashflow requirements
• Risk (tolerance / capacity) assessed correctly in
  order to determine outcomes likely or required
• Investment Strategy driven by required outcomes
• A long-term strategy binding adviser to client
  through generations

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Client Value Perception

• Regular review of Actual v Predicted in light of
  Market Movements and regularly reviewed objectives

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Client Value Perception

• All areas where perception of added value is
  greatest and disintermediation is difficult
  Wealth Management

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Choosing an investment strategy to complement a
planning strategy
New Model
Old Model

• Focus on Transaction
• Product-Centred
• Commission Based

• Focus on Advice
• Service-Centred
• Fee-Based

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True Financial Planning
Transaction Focused
Advice leading to Product Sale
Transactional
Advice-Lead
Commission cover Fee
Transparent Fee
Pure Commission
No Trail if possible / All commission Accounted
Trail used to Cover Servicing
Direct Client Engagement
Relationship with Provider / Non-platform
Use Supermarket (Bundled AMC)
Use Wrap - Open Architecture
Highly Structured Servicing
Ad-hoc Servicing
Margin Sits with Adviser
Margin Sits with Providers
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Old / New Subtleties

• Prime Relationship / Margin with Provider
• Infrastructure Based around finding and selling
  to new clients
• Value perceived in product / performance

• Prime Relationship / Margin with Client
• Infrastructure based around high levels of
  ongoing service for existing clients
• Value perceived in meeting detailed objectives

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Implications to Investment Process

• For the Business
• Investment Process becomes the means to
  facilitate business model
• No longer the Focus
• For the Client
• Investment Process becomes the means to achieve
  Objectives
• No longer the Focus

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Whether Investment Outperformance should be the
goal

• Beating the Market is Very Difficult
• A Random Walk Down Wall Street (Burton G.
  Malkiel, WW Norton and Co)
• Smarter Investing (Tim Hale, Prentice Hall /
  Financial Times 2006)
• Beating the Market is Unnecessary
• Asset Class Funds
• Outcome Driven Investing / Target Return
• Active v Passive

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How much to outsource - the management or the
process?

• How much time / resource required to provide
  desired level of service?
• How much profit generated?
• Adviser Value-adds
• Objective Setting
• Asset Allocation
• Risk Profiling
• Review / Rebalancing
• Outsource remainder
• Investment Selection
• Implementation

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Outsource What?

• Segment Clients
• Advice Led
• Outsource Fund Management
• Keep process
• Higher fees, higher costs
• Higher client commitment
• Transactional
• Outsource Fund Management
• Outsource Process
• Lower fee / trail, lower costs
• Lower Client Commitment

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Cost Benefit

• Cost
• Time, Resource, Systems, Expertise, Compliance,
  Risk?
• Revenues
• Drag back value chain to 1 pa?
• 25m at 1 250,000 less costs
• 25m at 0.5 125,000 net.

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Some Other Factors
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Depth of Resource..

• The expertise, specialisation and resource
  available to most global investment houses
  enables them to research a far greater number of
  managers, stocks and asset classes in much
  greater depth than can be expected of the vast
  majority of financial advisors.

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Greater Reach..

• The potential weight of money that a Manager can
  allocate to underlying funds and securities will
  give them access to a far wider manager universe
  (often institutional funds and funds closed to
  the retail market) than would normally be
  available to individual investors and financial
  advisers.

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Tactical Allocation..

• Underlying funds and securities will be combined
  or balanced to minimise correlation and risks,
  and will take account of the Managers investment
  philosophy arising from their view of the
  economic and market cycle.

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Compliance Risk..

• The use of leading outsourced investment managers
  will reduce the IFAs compliance burden by
  achieving adequate diversification but with a
  positive impact on profit margins.
•  

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The Value..

• The advisor is no longer responsible for
  maintaining the performance of a large number of
  individual funds. Instead they are responsible
  for selecting the appropriate outsourced
  investment manager who has an investment
  philosophy and processes that most closely mirror
  their and their clients needs.  

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The Positioning..

• Appointing a leading investment manager to run
  their clients wealth sends a message to clients
  that it is the advisors expertise and indeed
  their standing that has enabled them, the
  advisor, to select the best for their clients.
  This becomes part of the service proposition.

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Creating Investment Solutions

• Must have a Philosophy
• Must have a Process
• Not Portfolios, Funds, Stocks
• Solutions
• Segment Clients, Menu of Solutions
• Core Satellite for each Segment
• Outsource what is Low Value, In-House High Value
  within Budget / Business Plan