Financial advice firms should prioritise governance conversations when it comes to understanding their investment partner’s ability to generate both good investment outcomes and value for money, urges Hymans Robertson Investment Services.
This is particularly important at times like these when there is heighted uncertainty over future market direction.
The firm says advisers can use five key questions to test their investment partner’s governance and ability to deliver future benefits for clients.
The questions will help advise firms to gain insights about their investment provider’s people, strategy, processes, experience and investment manager choices, all key areas that can impact returns. Whether explored or not, governance is always a foundational factor in the success of a partnership, therefore a focus on this area can only benefit advisers, said the DFM.
Key areas that advice firms should explore with their model portfolio providers were highlighted as:
• The provider’s team: investment decisions should be made by high quality and experienced teams and clear decision-making structures should be in place to deliver resilience and continuity.
• Investment strategy, including scenario testing of the strategy’s robustness also needs to be a priority. This is because evidence shows this will be main driver of investment outcomes over the long-term.
• Providers should also be able to show that a fit-for-purpose investment manager line up is in place, as this supports diversification and cost efficiency, e.g. using a blend of active, passive and innovative approaches such as multi-factor.
• Ongoing monitoring of the portfolio and funds, to make sure it is acting and performing in line with expectations, is also a must and should be a point of exploration.
Commenting on the value that IFAs can get from assessing their investment partner’s governance structures, William Marshall, CIO, Hymans Robertson Investment Services (HRIS) said: “With institutional funds it is well known that there is a governance dividend, research suggests this return dividend could be as much as a 1-2%p.a.. As with many lessons learned in the institutional investment world, the principles of investment governance are increasingly important to retail advisers, especially in the context of model portfolio services.
“By adopting a strong approach to governance standards, advisers can have confidence that their investment portfolios remain relevant and compliant. They may even benefit from the governance dividend too. This potential dividend becomes increasingly important as advisers and MPS providers face higher demand to demonstrate that their services offer value for money.
“Without understanding the impact that their partner’s governance has on their client’s outcomes many advisers could be forgiven for treating it as a tick-box exercise. But, if approached critically, advisers can achieve tangible gains for their clients with little additional effort”
The five questions the DFM suggests advisers should consider using to assess their investment provider’s governance structures are:
1. What is the depth and experience of the team supporting my portfolios and do you have a researched evidence-based “playbook” to implement (and to support clients), in times of crisis or volatility?
2. How do you make asset allocation decisions, and do you test your portfolios against different market scenarios?
3. How do you use active, passive and multi-factor investing, and do you have evidence to support your choices?
4. What oversight and challenge processes are in place to ensure portfolios remain aligned with risk targets and regulatory requirements?
5. How do your investment and reporting processes support advisers e.g. your ability to answer ad-hoc questions, provide regular manager updates etc?
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