When advice is not bespoke
Client question: I have an investment portfolio managed on a discretionary basis by a major banking institution.
I have to say I am not sure that they are giving me a particularly bespoke service and they have recently sold all the individual shares in the account and purchased collective funds through a provider who is part of the same group. Is this normal?
Nick answers: Some discretionary fund management firms provide a truly tailored approach to their clients. The assets held within the account being a true reflection of an identified set of consumer needs and wants. This service often comes with a high level of reporting and the client feels as if they are receiving a proper bespoke service.
Often though we come across what might better be described as a more “vanilla” approach, one where if you looked at a range of clients with different needs and wants some 70-80% of the underlying portfolio would be the same. The discretionary element then becomes more about the timing of buying and selling assets rather than a thought through analysis of the clients needs.
Collective funds may well form part of both advisory and discretionary portfolios and there is nothing fundamentally wrong with that. In fact collective funds can be a very sensible approach providing as they do a diverse portfolio of underlying assets. In our experience a typical discretionary managed portfolio is going to hold a small number of Fixed Interest stocks, probably some UK Index Linked Stock and a couple of Corporate Bonds and then some FTSE 100 directly held shares across a range of sectors.
It is likely for any International equity holdings or for Property or Alternative investments the discretionary fund manager will probably use collectives and there are some good reasons for this. They may not have the research capacity to select individual shares in International companies. It may be a relatively cost efficient way of buying these holdings for your portfolio.
In fact most of the holdings in an advisory portfolio are likely to be collective investment funds (Unit Trusts, Open Ended Investment Companies etc). The problem that I perceive that you have though is that all of the collective holdings in your portfolio come from the same provider and I have to say that would make me very uncomfortable.
It is highly unlikely that one fund management group is going to provide you with the range of funds where they can truly claim to offer “best of breed”. There are just so many funds to choose from that one fund management group is going to struggle to offer you great performance across all the asset classes that you would want to see represented in your portfolio.
Some of the private banking sector firms have chosen to take this approach with the portfolios that they have below a certain size. For example they may choose to offer a discretionary portfolio including direct investments for portfolios of £500,000 and above. It would be easy for the consumer to conclude that such firms really only want their business at and above a certain level. This is not to criticise then it is after all for each firm to decide where they want to bring their services to market.
You might though start to wonder why you need a discretionary fund manager. It might be more appropriate for you to engage with an advisory firm who can still provide you with the same flows of information, and offer a wider choice of fund management groups and facilitate the purchase of direct investments where they are appropriate.
Most advisers these days have access to platforms that enable the consumer to have a clear view of what is going on and to be involved in the investment decision making process. Recent research suggests that such involvement is high on the list of wants of investors.