With increasing numbers of financial advisers using outsourced solutions for their clients’ investment needs, the multi-asset market, in all its different guises, has swelled.  This level of choice is a boon but, by the same token, the task of reviewing this investment labyrinth to find the most appropriate products and services is not to be under-estimated.

Multi-asset solutions are available in a number of different forms, from simple packaged solutions at one end of the spectrum, to directly-invested discretionary portfolios at the other.  Below, we make some generalised comments:

• Traditional multi-asset funds: many of the more traditional “cautious” or “balanced” type of funds still exist today.  Typically, they have a straight-forward investment blueprint and are confined to the main asset classes of cash, bonds, equities and perhaps commercial property.  Simplicity is their virtue and they are often keenly priced.
• Diversified growth funds: No single definition encapsulates diversified growth funds.  Capital growth is the priority and typically, a manager will use diversification as a way of generating returns from a wide range of different types of assets, thereby reducing the risk of investing purely in equities.
• Outcome-focused funds: Outcome-based investing is the investment buzz-phrase of the moment.  Using sophisticated investment and risk techniques, managers create portfolios that are run to specific return and risk parameters.  When set within a multi-asset and global investment framework, managers have flexibility to scour the world for alpha-generating and risk-offsetting strategies, which they aim to bolt together into a coherent structure.  The value of holding such funds is often best appreciated when underlying markets are not going up!
• Multi-manager funds: Rising in popularity through the 1990s and 2000s, the multi-manager pitch is that they can scout the whole market for the most attractive funds to blend together.  Under cost scrutiny and competitive pressure from alternative portfolio services, multi-managers have sought to enhance their value propositions by producing high quality reporting and working more closely with key clients.
• Model portfolio solutions: Model portfolio solutions are very widely available and allow advisers to access fund selection/blending and asset allocation expertise, tailored to a range of risk profiles.  Advisers are also less exposed to changes of lead manager compared to single fund solutions.
• Discretionary fund managers (DFMs): DFMs are a popular outsourcing option for advisers who have customers with significant assets.  Customers have direct access to the investment manager through regular meetings and receive detailed investment and tax reports.  There is usually scope for creating bespoke solutions as well.

Each of these product types have their attractions, but in a generalised sense, we cannot assert that one option is “better” than another.  A more pertinent question is to ask is, which of these different multi-asset solutions work for an adviser’s client bank and for the structure of the business itself?

What is the shape of your investment proposition?

Good financial planning is always at the heart of an adviser’s business, but the resources available for the investment component varies significantly from firm to firm.  For some, a range of multi-asset funds (traditional multi-asset, outcome-focused, multi-manager, etc.) can be sufficient to satisfy their clients’ needs and indeed, the simplicity of such an offering may also be the most suitable route for the business to take.  For others, the nature of the client base may demand the more comprehensive investment services of a discretionary fund manager and again, this can work well as a fully-outsourced solution.  For firms that wish to offer a more integrated investment service, model portfolios can be a value-enhancing option.  They can be labour-intensive to administer, but where they work hand-in-hand with a customer risk assessment process, they bring efficiencies and clear paper trail evidencing the client’s attitude to risk and decision tree.

Size isn’t everything!

A business may also segment its client base to help navigate a plethora of different investment options.  Most obviously, clients with larger portfolios may be directed towards a discretionary service, while smaller clients, for practical reasons, may be best-served by a multi-asset product.  The selection process should not stop there, however.  Discussions with the client may reveal a high sensitivity to costs, which would exclude an all-singing-all-dancing discretionary service.  Alternatively, a client may be seeking an absolute return-type approach that may be less easily achieved through a traditional model portfolio/discretionary service.  Income may be a priority, in which case a diversified, multi-asset income product could be the most appropriate solution.  Above all, client needs should not be subservient to business processes.

Building a “sufficient” range and matching to client objectives

Under the MiFID II regime, the FCA states that independent advisers must have a process in place to ensure that they have assessed and approved a sufficient range of relevant products to satisfy the various objectives of their different clients.  The requirement for a “sufficient range” means that advisers can decide upon the shape and scale of the approved panel, as is appropriate for their client bank and business structure.

The task of constructing and monitoring an approved panel of multi-asset solutions is no small undertaking.  The burden of qualitative analysis is significant, given the requirement to understand so many factors such as investment mandate and objectives, the role of asset allocation (with or without tactical tilts), risk guidelines, implementation, oversight and reporting.  Adding further complexity, individual discretionary managers within the same firm can have flexibility in the way they implement the standard investment process.  RFPs and spreadsheets cannot answer all these questions.

It is incumbent upon adviser firms to have a clearly-articulated process governing when, and how, to use the different products and services in their armouries.  Simply preferring, or having greater familiarity with, investment manager ‘A’ over investment manager ‘B’ will not satisfy the regulator.  One benefit of a robust due diligence and governance process is that the defining features of the different products and services are well understood and hence, they can be explained clearly to clients and matched with greater confidence to their needs.