Successful fund selection requires intensive research, so what resources do Financial Planners use to ensure their clients are provided with suitable portfolios? Nicola Brittain found out.

Although the expertise of the Financial Planners and the investment specialist overlap, they are have a different focus, arguably resembling that of an architect and structural engineer.

A Financial Planner would have an overview of their client's financial circumstances – helping with tax planning, risk assessment and cash flow modelling - while an investment specialist will tend to be knee deep in the nitty gritty of market movements and economic forecasts. As such many Financial Planners outsource to an investment specialist such as a discretionary fund managers (DFM), deeming this work outside their remit. Others will have created simplified or centralised investment propositions in a bid to de-risk their business. But there remain a considerable number of planners that conduct fund research themselves or work closely with their Paraplanners and investment managers to create suitable client portfolios.
So what processes, tools and information do planners use to ensure their clients' funds are suitable?


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Risk assessment
Assessing a client's appetite for risk is essential to selecting suitable funds and this is done by a planner during the initial fact find. Lee Robertson CFP and CEO at Investment Quorum uses Distribution Technology's Dynamic Risk Profiler, as does Paul Lindfield Investment Manager at Sedulo. This tool provides 20 questions that give a psychometric risk profile and then allocates a 1-10 risk score. However, all agree that receiving answers to these questions is only a starting point.

Danny Cox CFPCM and head of Financial Planning at Hargreaves Lansdown says: "When we use risk profiling tools, clients can't really relate to the answers and tend to assess themselves as medium risk. The best thing to do is ask what they want from their investment and then break this down. A good guide to risk tolerance is an assessment of previous and current investments."
Robert Forbes, financial planner at Plutus Wealth uses a further tool, Statpro, to stress test portfolios against potential market changes. "We might model the effect of a 10% drop in equities on a portfolio and then see how the client responds to this. There are numerous scenarios and we run tests according to what is going on in the world. This helps us determine the client's capacity for risk."
A planner will then provide clients with risk-adjusted portfolios created in-house, set up a bespoke portfolio, use external panels/portfolios or suggest the client would benefit from a DFM.
Many companies such as Hargreaves Lansdown and Chase de Vere have in house investment research teams that create model portfolios for their clients. These model portfolios ensure a diversified spread of funds for any one client. Although these are created in house, as Justine Fearns, research manager for Chase de Vere explains, model portfolios across the industry are underpinned by Harry Markowitch's Modern Portfolio Theory. "These models and theories are based on huge amounts of historical data," she says.

"We, like other planning firms, combine Modern Portfolio Theory with a more forward looking approach. New funds may be chosen or dropped according to our own knowledge gleaned from market outlooks and the Economic Review for example," she adds.

Many planning firms such as Hargreaves Lansdown, Chase de Vere and Plutus Wealth use IMA sector data from FE Analytics. Fearns explains that to get to a panel of 150 from more than 10,000 entries, the research specialist would run a 'quantitative screen' of each sector against a sector benchmark. She would assess a fund's performance over a five-year period within an upward, sideways and downwards market to see how it behaved.


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Hargreaves Lansdown creates its panel of 90 by looking at consistency over time. The company looks at fund managers and not the funds, meaning that new funds enter the panel regularly. "We look at fund management over a five to seven year period. Once the quantitative selection is done then we meet with the managers," Mr Cox says.
Financial planners at Investment Quorum have discretionary permissions, this means they can rebalance portfolios where they see fit. Again, the company uses FE Analytics, and creates a fund squad of 100. Funds in this panel are assessed according to performance, manager investment in the fund, consistency of returns, and component parts. Although there are some passive funds in the squad – market or asset class plays - the company uses active most of the time. "It's hard to argue against alpha managers and past returns demonstrate that," says Mr Robertson.

In light of onerous compliance requirements, smaller companies may opt for a simplified investment proposition such as that established by Sedulo Wealth Management in April last year.
Sedulo's director of wealth management, Paul Lindfield, explains that his IFP accredited Paraplanner Rachel Lonsdale tends to use external panels to select managed, sector specific and risk-targeted funds.

The company pays Threesixty Services for compliance support and this includes access to its panel including specialist investment research. Portfolios provided by Threesixty can be matched to a risk rating used by Sedulo, and will consist of passive and active funds. Mr Linfield says: "We would use Threesixty's risk-targeted managed funds for regular premium contracts such as pensions. These are an independently researched range of funds with a minimum three year track record and are rebalanced daily. It is a low cost solution."
The company also uses the Morningstar Old Broad Street Research (OBSR) model portfolios, which is more expensive and is purely active. "OBSR funds tend to be best of breed in terms of their relative sector and consistency of performance, some clients are less bothered by cost and want better quality," Lindfield adds.
The company is able to conduct research and offer funds outside these low-cost offerings where necessary.
Another option for financial planning firms is the creation of a Centralised Investment Proposition (CIP). A CIP comprises a limited number of risk portfolios. Plutus Wealth offers its clients a CIP comprising five risk allocated solutions each comprising strategic asset allocation, the investment research is done in house. Robert Forbes, financial planner at Plutus Wealth, says: "Each quarter we modify the deviation percentage or weighting according to market movements. The funds in each portfolio (comprising about 15) tend to be paired; these pairs consist of a low cost tracker and an active fund. Each pair would cover the same region or commodity. That the CIP has just five portfolios means the company benefits from economies of scale.

Assessment of information
At Investment Quorum, an investment manager builds model portfolios and has meetings with investment managers, but they will also use data from a number of sources.
Mr Robertson says: "We get qualitative data from Morning Star and Citywire as well as research information from 7IM. Pulling all this information together we can assess a fund's performance. We would also look at the parent company, the quality of the people involved and the fund's value for money."
Relationship with fund managers
Once a rigorous assessment of funds is done using tools such as those mentioned, many planners or members of an investment research team will meet with the fund managers themselves.
Mr Robertson says: "Many fund managers are ruthless in their presentation and of course they have their own agenda. An investment specialist needs to be pretty clued up prior to this meeting."
Mr Cox says: "We will ask how the funds are managed and how the managers are paid – we will be impressed if they've invested in the fund themselves because this is an incentive. We tend to meet them once or twice a year. If there are any problems they come to meet us."
But not all planners or investment specialists consider these meetings necessary. When a new fund makes it onto the Chase de Vere panel, the company would ask for a Request for Proposal (RFP) document from the fund manager. This provides in-depth information on how the fund is run.


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Outsourcing investment management grows in popularity
With increasing regulation and growth in the complexity of financial products financial planners are more likely to outsource investment decisions and focus on their core work. This is supported by data from financial analyst Defaqto which states that overall the average percentage of UK DFM business from advisers has increased from 53% to 58%. Many of these advisers or planners will use multi-asset or multi-manager funds from DFMs through platforms or external panels that aren't as costly as a bespoke DFM solution.
Those clients that do opt for a bespoke DFM solution are likely to be more wealthy than average or have specific requirements.

For example Sedulo's Mr Lindfield recently referred a client who had acquired £1m in cash to a DFM. He says: "Following lifestyle planning we established that the client wanted specific yields because the money needed to last a lifetime. This portfolio is now managed by Quilter Cheviot on a bespoke basis. We have also use Standard Life Wealth for clients seeking higher cash returns."
Chase de Vere has a panel of DFMs comprising Rathbones, Brewin Dolphin, Quilter, Investec and Smith and Williamson. Ms Fearns explained that the vast majority of clients outsourced to DFMs are those awarded sums in personal injury claims (one line of Chase de Vere's business). "These funds have to be closely managed on a bespoke basis as many of these clients are badly injured and need their money to last," she says. Otherwise a small percentage, approximately 5%, of ordinary clients use bespoke DFMs on top of portfolios. These tend to be the most-wealthy clients.
Hargreaves Lansdown runs its own discretionary service and outsources a very small percentage of its work. In rare cases it uses Smith and Williamson and Brooks Macdonald.

"Most clients want simple solutions but we do use DFMs where they want esoteric investments such as wine portfolios, structured products or income property partnerships. We don't deal with these funds in house. We charge a fee for advice and for managing portfolios but where we use a DFM, the client pays them direct," says Mr Cox.
It might be expected that a company that uses CIPs – and so has fewer in house portfolios - would be more likely to use DFM solutions. Robert Forbes Financial Planner for Plutus Wealth Management, which has a CIP, says that approximately 10% of his clients do so. The company uses Brewin Dolphin and Psigma Investment Management. Forbes says that in his experience, the decision to use a DFM is determined by personality rather than portfolio size. "Some clients have used DFMs in the past and want to do so again. In my experience younger clients are less inclined to use them perhaps because they haven't had exposure in the past."
It can be very difficult to get information on portfolio performance from DFMs, and where portfolios are bespoke, any information given may not be useful. However, planners often do their own research on the companies. Forbes explains that his company's investment managers have an annual meeting with the Asset Research Consultancy which provides them with due diligence information on the DFMs they use.


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Key points
1. Many Financial Planners are using Discretionary Fund Managers or Centralised Investment Propositions to outsource clients' investment manager to better resourced companies
2. A significant number of planners, however, prefer to manage client investment themselves, sometimes using help from third parties and many use risk-based portfolio templates to suit client needs with bespoke alteration when needed.
3. It can be difficult to get update performance details from DFMs at times due to the nature of individual portfolios but vigilant monitoring of any outsourced investment is important.