November 2007

Tools of the trade

The process of providing financial advice has come a long way since the first online offerings were introduced. With developments continuing at a rapid pace, it is useful for advisers to understand how the tools can be best used to enhance their business.

Asset allocation in particular is one area that can benefit greatly from the use of online tools.

Online asset allocation tools take an enormous amount of data and process it, a process that would take an incredibly long time if not done online. Advisers may need to invest a little time getting to know the tools and how to use them, but the time that they will ultimately save makes the investment well worth it.

As a process, asset allocation can be seen as one step in the three stages of portfolio construction, from assessing a client's risk profile, to modelling the asset allocation, to finally selecting the funds. Today all those stages have been made easier, but at the same time far more robust, by the growth and development of online tools.

A detailed risk assessment has to be the starting point for any portfolio construction. The questions asked should truly ascertain how a person feels about taking financial risks, as well as taking into account material factors such as how long they are likely to have until retirement. Using online questionnaires ensures that an audit trail is created right from the start.

Risk profiles

With the risk profile determined, a choice of asset allocation tools can be used to overlay what asset allocation would be most appropriate for the individual. There are a number of options which advisers may wish to consider - depending on the client and also what fits best with the adviser's own business model.

Using optimised portfolio tools, advisers simply take the result of the client's risk profiling, select whether they want to optimise for yield or growth, and the tool provides the adviser with the relevant asset allocation. Tools such as these should start by being 'pure' asset allocation models that are not created with any parameters so that there is no bias in the model. However, if the client is averse to any particular sector, the adviser can use the tool to re-optimise and the calculation engine will recalculate the asset allocation appropriately.

Another option that is popular with many advisers is to use managed solutions. Essentially this involves outsourcing some, or all, of the asset allocation decisions to a third party multi-manager. The provider is then responsible for the selection and monitoring of the fund managers within the fund. Investment solutions can be used to construct either the entire portfolio or part of it, depending on the level of responsibility for the asset allocation that the adviser wishes to take.

There is no right or wrong answer as to which of these approaches an adviser should take. The important point is that the method chosen is appropriate for the client, and appropriate for the adviser's business model. For example, the FSA raised the point in their discussion paper on platforms, published in June this year that assets in a portfolio will also grow at different rates so over time the asset allocation will change. This creates a need for rebalancing, which some advisers will carry out as part of a regular review service. However, if advisers do not offer this service they may consider using an investment solution that is self-rebalancing or outsource the rebalancing by using multi-manager solutions.

With the asset allocation decided, the next and final step in the process of building the portfolio is that of fund selection. Advisers today are faced with an overwhelming choice of funds and a huge amount of data about those funds from a variety of sources. Again, help is at hand from online tools to help collect and analyse that data. Research tools can be used to source a wealth of information about different funds including ratings, fund charges, risk/return matrices, yields, payment dates and performance - measured as cumulative performance and by ranking. Risk measures can also be added such as volatility, annual alpha, annual beta and maximum loss and gain.

With the data assembled, the next step is to filter it. Here the benefits of online systems are clear again, allowing the user to collect and interpret vast amounts of data. Filters can be used to narrow down the options, segment and rank funds. The application of filters allows advisers to select the most appropriate funds for their clients from a tailored choice.

Audit trail and reporting

Accountability and clear record keeping is increasingly important in the arena of financial advice. Another beauty of using online tools is that each step of portfolio building can be captured and recorded in an audit trail. The whole process can be clarified in an end report detailing the answers and outcome of the risk profiling questionnaire, the chosen model and any amendments made, the research items and filters used for fund choice, and finally the funds selected. A final report can be produced for both the client's and adviser's record showing exactly what is happening under the skin of the portfolio. All of this adds up to give a robust, compliant audit trail.

The future efficiency of advisory business relies heavily on the increasing use of e-services. Investment platforms can deliver tools for a variety of functions via a single point of access. These tools provide advisers with an efficient process that enables them to take the information they have gathered in fact find and then determine the client's attitude to risk, ascertain an asset allocation, choose funds, select the right tax wrapper solutions and come up with a comprehensive recommendation backed up by detailed reports.

With the current market place offering the adviser a plethora of tools and e-services, figuring out which will offer the best support to their business needs careful thought. Just as advisers are moving away from standalone product sales and looking to build long-term relationships with their clients, they are also increasingly looking for providers that they can work with as a business partner over the longer term

E-business tools are one way of moving towards the goal of business efficiency. The key for advisers is knowing how to incorporate e-business services into their normal business processes. The ultimate aim is that their careful use will make an adviser's business more efficient so that the adviser has more time to spend with clients.

Alison Everett
E-Business Marketing Manager
Skandia