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Insource or outsource? Who’d be an adviser?

I am not an adviser; I do not want to be an adviser; quite frankly, I haven’t got the balls to be an adviser. Pre-FSA 1986, I ran a nicely profitable consultancy, largely in group pensions with some individual work. My last transaction was investing a six-figure sum in equities hours before the ’87 crash.

I wasn’t happy with the transaction, thinking markets were toppy. However, an accountant introduced the client and the client was his mother. The instruction was to invest! I was not happy then, afterwards and I am not happy now. This is why, inter alia, I am not an adviser.

Today most advisers outsource or insource expertise. Relatively few advisers carry out asset allocation and fund selection themselves. Personally, I can’t imagine why any adviser would want to. Leave that to those who can read the runes. So what is the right answer?

Ignoring bespoke stuff, which should really only apply to those with (1) special individual needs e.g. large immoveable holdings elsewhere AND (2) large portfolios, most solutions revolve around a selection of asset allocation models and a fund selection process. You can run this as an IFA using bought-in asset allocation and fund selection tools; you can go to an asset manager for a packaged/OEIC solution i.e. multi-manager; you can go to a discretionary manager. In essence, these are the same solution with different packaging – if you ignore all the industry bull—t!

The FCA is concerned how outsourcing choices are made; they are concerned about due diligence in process, about suitability and they are concerned about the use of platforms where packaged solutions are recommended. PI insurers are becoming equally concerned. I am delighted I never became an IFA!

When we have looked at IFA criteria for selecting external experts and tools, we have found little consistency of process and criteria.

For many, cost is not an issue. This may be because it is often very hard to identify total cost. But cost is important. This heading was in one of today’s online trades:

“DFMs under pressure over portfolio charges as FCA considers review”

There is also some (I did say “some”) ignorance of cost. When asked the TER or OCF of his favoured multi-manager fund recently, an adviser answered .75%. The published OCF is 2.3%. That is before adviser and platform charge. Do the math! The equity premium over the last 100 or so years is 3-3.5%.

Most will argue that performance is important, but some recommend managers who do not publish auditable performance figures.

Then there is the issue of tax. How many advisers put their HNW clients’ unwrapped assets in OEIC funds (multi-asset or multi-manager) to avoid CGT on transactions within the portfolio?

How many advisers harvest CGT gains on funds to utilise the allowance?

How many advisers consider the impact of tax on equity dividends and bond interest when investing across wrapped and unwrapped portfolios?

Who’d be an adviser? I wouldn’t.

The FE Investment Summit sets out to address these issues, if you’d like to come along you can view the brochure here

You can also get involved in our discussion forum on this very topic run by the estimable Mark Polson here

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