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Discovering the pitfalls of in-house fund picking

27 April 2020

Asked to pick funds for a client, Rebecca Kowalski, paraplanner and compliance officer at Cornerstone Asset Management, came to realise that outsourcing has distinct advantages for her firm.

This article was first published in the April 2020 issue of professional Paraplanner.

Cornerstone Asset Management runs an outsourced Discretionary Management centralised investment proposition. Over the years, this has made my life much easier, both as a paraplanner and latterly as compliance officer.

Having recently offered to carry out some paraplanning for a particularly bespoke case, I found myself picking funds for the first time in quite a while. This process felt quite strange to me and I therefore felt compelled to communicate my thoughts about it.

My office runs a Fantasy Football League. I thoroughly enjoy it, I even won in my first season, despite bizarrely restricting my players to those whose team colours didn’t clash on my screen! I haven’t managed top spot since then and am definitely third quartile this season.

None of my colleagues have won more than once over the years. Some of us take more risks than others, some are swayed by personal bias, others just haven’t read the rules properly but often it is luck that governs the scores. These factors can also have an impact when some financial advisers pick investment funds.

Outsourced DFM vs bespoke

When I joined Cornerstone, I found the outsourced DFM strategy revelatory in many ways. As you would expect, it makes a paraplanner’s job simpler, freeing up time to concentrate on building financial plans for clients, managing the adviser relationship, running cashflow modelling scenarios and getting involved in other aspects of the business (something I have definitely taken advantage of).

Working recently on my fund-picking task, despite having access to investment research software and an externally researched fund panel, I found my report work taking much longer than a typical recommendation using one of our discretionary portfolios. Checking income yields, aggregated charges, overall asset allocation and saving numerous factsheets and KIDs all added to the labour and in some respects, in my view, adding little value for the client.

As a paraplanner for previous employers, I have enjoyed the fund picking aspect of my role, finding myself on the Investment Committee and writing investment briefings for clients. I read the investment press, passed the G20 exam, attended seminars and thought I was very knowledgeable. However, at Cornerstone, after meeting and building relationships with the discretionary managers, I realised that my knowledge was limited.

I had grasped some key pointers, such as the fact that new funds can struggle to sustain their early success, that top quartile funds are often there because of the risky positions they are taking and that in certain sectors (such as US equity), it’s very hard to beat the index. What did I know however about hedging, about more bespoke alternative investments and about when was the right time to sell emerging markets?

Although I might have researched the fund managers, heard them present or very occasionally sat next to them at a lunch, what did I really know about their strategies or what they would do next? Would Neil Woodford have answered my phone call? Would I have treated any of them as trusted colleagues, as I do with some of the teams we work with at our DFM partners?

Now, with my compliance officer hat on, overseeing eight advisers, it provides great reassurance that the investment selection aspect of our advice is centralised and managed by experts. As a result, any training, development and resources can focus on areas that really benefit the service we provide to clients.

We have recently helped a number of clients deal with sudden, unexpected bereavements and serious illnesses. It has been very clear that these people, in vulnerable positions, need good guidance, time with their adviser, the removal of stress and complexity. The last thing they want to concern themselves with is which fund managers we have picked for their portfolio and why.

In my view, having a robust, consistent and efficient outsourced discretionary management proposition is one of the cornerstones of this business.

Professional Paraplanner