January 2008

A flawed approach

Dear Editor,

The platform market in the UK is still developing but already some basic flaws are appearing.

The core reasons for consolidating client's assets in a single place we know: simpler administration, the use of lower cost portfolio type wraps in place of discrete products, greater investment visibility, and greater cost transparency.

However, the gain for the client of consolidation is that it enables something which our product-obsessed past has too often overlooked; the implementation of an overriding investment strategy and the execution of that strategy in the form of the actual, day to day investment management.

It is this last area, the investment management, where traditional wraps simply do not offer a service sufficient to satisfy the requirements of the professional adviser nor the regulator.

Applying a coordinated, risk controlled investment strategy to the entirety of a clients' investments is more than merely "desirable" - it is a fundamental demand of best professional practice.

The common and entirely reasonable approach, to meeting the first requirement is to use risk profiling tools to determine an appropriate asset allocation. Fair enough.

It is the final area where traditional wraps come unstuck; they offer very limited help in the day to day investment management. The adviser is still stuck with the obligations of identifying investments, research, trade execution, monitoring the portfolios, rebalancing, reporting and so on. Moreover the compliance demands are actually increased by the use of a platform.

Even worse are the implications of TCF. It's very difficult to justify those clients identified as having similar objectives and risk profiles, having different shares and funds within their portfolios but this is what is demanded by the TCF regime.

This problem only gets progressively more intractable with increasing numbers of clients using the platform. Simply, it is impossible to execute a fund switch with a standard portfolio for 500 advisory clients. By the time you've received advisory consent from the last client it's probably not worth doing the trade. How this can be squared within TCF is unknown.

There is only one solution. Consolidate client assets on the next generation of platform, Outsourced Investment Platforms. Using a discretionary mandate, OIPs take on the responsibility of the actual day to day investment management and still leave the adviser in control of the vital issues - the financial plan, strategic asset allocation and above all, the client relationship.

Any advisers consolidating client assets to platforms without a discretionary mandate should think twice. In perhaps two or three years' time, investment outsourcing is likely to be the common currency of financial planners.

Paul Miles
Sales Director
Parmenion Capital Partners