Fact vs Fiction: Why Bespoke Advice Beats Bespoke Portfolios
Imagine you take your pension and ISAs to a typical wealth manager. Arrive with £50,000 or £100,000 and you’ll be politely ushered into one of their model portfolios, possibly with a degree of apology. Bring £250,000 or more and you’re through to the ‘VIP room’ and given a bespoke portfolio. But the idea that a firm’s ‘model portfolio service’ is somehow the poor relation is as perverse as it is outdated.
Many traditional UK wealth managers’ websites and glossy brochures tell you that you need a bespoke investment portfolio, designed around your individual needs. This will be ‘carefully constructed’ in accordance with your ‘unique objectives’, creating an investment strategy that is ‘individual to you’. Your bespoke portfolio will be constructed and managed by your ‘personal investment manager’, to whom you have a direct line and who will meet with you regularly.
At first glance, this approach appears to make sense. After all, everyone is unique and has their own specific financial goals and reasons for investing: some investors may seek a comfortable income in retirement, while others may want a financial cushion for their family.
A closer analysis, however, sheds a different light. Each client has unique needs and individual circumstances, and therefore most certainly need individual – indeed bespoke – financial advice and planning. But does a bespoke investment portfolio make any sense?
Bespoke portfolios: the firm’s best thinking… watered down just for you
Most wealth management firms employ a central team of specialist investment managers with many years’ experience of investing. They spend all their time looking at the macro-economic picture, the financial markets and portfolio construction and risk management. They research, analyse and manage a set of asset allocations for diversified investment portfolios. Each of these ‘model’ portfolios reflects the ‘best thinking’ of these investment professionals for a specific risk-reward profile or set of investment constraints.
The upshot of this is that any subsequent change that a client adviser or ‘personal investment manager’ makes to the model portfolio allocations is, by definition, a move away from the firm’s best thinking. To add insult to injury, the change has been made by someone significantly less qualified to do so than the specialist investment team – and who would want that?
Centrally-managed portfolios: the superior option… with a lower price tag
Given the choice of (i) a bespoke portfolio run by your ‘personal investment manager’ and (ii) one of the firm’s model portfolios run by its central investment team, you should take the model portfolio every time, even if the fee is the same.
Happily, the reality is that, in addition to providing the best investment allocations the firm has to offer, model portfolios should also provide the benefit of substantially lower fees. Because centrally-managed portfolios not only give clients access to the highest expected returns of the firm, but are also significantly more cost effective than running a portfolio allocation per client.
For example, according to figures from Numis Securities, it costs an average of 1.8%* all-in to have a £500,000 discretionary portfolio managed by a UK wealth manager. The comparable cost of having the same sized portfolio managed centrally by Netwealth would be 0.70% (made up of Netwealth’s fee of 0.35% and underlying fund charges of up to 0.35%). This significant reduction comes from a vastly streamlined operational setup, and doing away with the expense associated with the salary and office costs of the personal investment managers. Of course, not all firms pass on the cost benefit and, if yours doesn’t, you should find one that does.
A 1.1% cost saving may not sound that much, but its effect can be truly eye-watering compounded over many years. For example, with an average growth rate of 5%, the £500,000 portfolio with the total cost of 0.7% ends up being worth £76,000 more in 10 years’ time – and that’s not even taking into account the fact that, by definition, model portfolios should have a higher expected investment return.
The best of both worlds: bespoke advice combined with centrally-managed portfolios
Ultimately, everyone’s circumstances are different, and therefore financial advice and planning needs to be individualised. Independent financial advisers (IFAs) and advisers/financial planners from wealth management firms (including Netwealth) are ideally placed for this. But this role should never be confused or conflated with that of the investment manager.
A good adviser will take into account your circumstances, your current assets and investments, your risk profile and your financial needs and goals. The process should result in a well-considered financial plan to give you the best chance of meeting these needs and goals. This is likely to include different ‘pots’ to be invested via one or more risk-return profiles, whilst also keeping an eye on the implications of the overall allocations – and you would expect to pay separately for this valuable advice.
However, once the planning is done, the investment team should take over. Each pot should be invested into the appropriate centrally-managed portfolio, to ensure the money is being managed by the best team for the job. Meanwhile, you and your adviser can arrange periodic check-ups on your financial plan and make any necessary course corrections.
Truly the best of both worlds.
*TER for the traditional wealth manager taken as the average TER of wealth managers listed in research by Numis and Citywire, as published by Citywire Wealth Manager in February 2015 (http://citywire.co.uk/wealth-manager/news/discretionary-fees-laid-bare-let-the-calculations-begin/a799209).
The value of your investments can go down as well as up and you may get back less than you invested.