Rob Southey, Head of Asset Consulting, Momentum Consultants and Actuaries

Introduction

Most funds, whether stand alone or part of an umbrella fund, make use of an investment advisor to help them achieve their investment objectives. Clients’ advisory needs differ, based on the expertise, experience, and time availability of their decision-makers (i.e., trustees or advisory body).  The needs to be filled by the investment advisor can take the form of pure advice, an implemented solution, or a combination of the two. The assistance provided by advisors also differs from advisor to advisor and is a function of their depth of technical and research resources, experience, philosophy, and access to appropriate investment management capabilities. Advisors with vast resources and experience can provide bespoke, intricate, and complex solutions, while advisors with limited resources and expertise need to keep their solutions straightforward. It is therefore imperative that the advisor’s approach fits their own capabilities and the characteristics and requirements of each client. Regardless of the approach applied, the functions required in advising and implementing an investment solution for a client must be expertly performed.

In this article I’ll highlight the key elements that must be included in the process of designing, implementing, monitoring, and continuously optimising an investment solution. I’ll also highlight the different approaches clients can adopt to best achieve their investment objectives.

Functions performed when advising clients on their investments

Included in the process diagram below are the functions that advisors must cover when providing clients with investment advice and / or an investment solution. The functions fall under the main headings as illustrated in quadrants 1 to 4 in the Investment Advice Process.

The requirements in each quadrant, combined with the expertise and resources required from the investment advisor, are detailed further in the table.

It is up the client to test that their investment advisor meets these requirements, and that the advisor’s proposals and recommendations can be adequately formulated given their own resources, experience, and expertise.

What should I get from my advisor – advice or an implemented solution?

Shown below is what we term the Investment Advice Continuum. The continuum comprises various levels of involvement between the client and the investment advisor.  For the hybrid and houseview solution models below, the investment advisor utilises asset management capabilities to provide an implemented solution for clients. Other options exist, but for the sake of simplicity, we have focused on the most commonly applied ones.

* What is a houseview solution? This is a portfolio that the advisor has constructed based on his expertise and experience and what he believes will be the best risk-adjusted solution for the average client. It is not as precise as a tailored solution, but more precise than an off-the-shelf product.

Which model is right for you?

The question will be answered by the quantity of time you are able to allocate to the investments of your fund and what the combined investment skillset of your decision-making body is. The more time you have to spend on investments and the higher your skillset the further to the left you can move in the continuum. In cases where clients can meet up to six times or more a year and allocate a number of hours to their investments at each meeting, the advice-only model is appropriate and results in a highly specific investment solution. This also encompasses a close and frequent working relationship between the advisory body or trustee board and its investment advisor. With this option, one would expect the investment advisory costs to be high due to the amount of time they will be spending on your fund.

Where this time commitment cannot be made, advisory bodies or trustee boards might be better suited to a model where their advisors provide a houseview solution that as closely as possible meets their membership’s return and risk requirements without being individually bespoke. This assumes that the investment advisor is monitoring the houseview portfolio on an ongoing basis and will proactively amend the portfolio should performance or volatility deviate from what was expected. The investment advisor’s costs will be lower due to the limited amount of time the advisor will be spending on your fund.

Clients with a moderate governance budget and wanting a more specific outcome for their membership, can employ a hybrid approach – in the middle of the continuum. This allows them to retain responsibility for the investment objectives and IPS, and then delegate the portfolio construction and manager selection to their advisor and associated portfolio management capabilities or team. The advisory body or trustee board is then responsible for monitoring this portfolio on a quarterly basis with the assistance of their advisor. This solution requires a fairly close and frequent working relationship between the advisory body or trustees and their advisor, but not as frequent as for the advice-only model. The investment advisory cost will sit between the two options mentioned above.

Summary

Decision-makers, i.e., advisory bodies and trustees, need to understand their investment capabilities and limitations in terms of total investable capital, technical expertise and importantly in time availability. This forms their investment governance budget. They then need to decide which model on the advice continuum fits in with that budget. They also need to ensure that the advisor they select has the necessary competencies as required by the Financial Planning Institute – namely Knowledge, Ability, and Skill to align with those requirements. Equally important, the profile and operation of the advisor (supported by its resources and processes) needs to resonate with you, and you need to trust and have faith in the advisor’s ability to deliver on the investment objectives.

ENDS