Why advice firms should consider an investment buddy

4 March 2021

Incorporating an investment buddy into a firm’s investment process can give access to the same range and depth of experience as much larger organisations, while still retaining full control, improving the firm’s business efficiencies while reassuring regulators, say John Calverley, chief economist, and James Chu, Head of Investment Solutions, Tricio Investment Advisors.

One of the popular phrases from the FCA in recent years is “value for money”. These three words seem to convey a clear concept. But exactly how it is measured is relatively vague and often quite subjective. For example, how should value for money be measured for financial advice? By the level of fee that an adviser firm charges? But does low cost advice represent value if the end investors does not receive suitable advice in meeting their financial goals? On the other hand, does value for money justify a high fee in getting the best investment performance?

Regardless of whether there is a scientific definition of value for money, it is clear that both the regulators and end investors will pay more attention to the advice fee (which is expected to stay low) and the quality of the advice outcome (which is expected to stay high). For advisers, this means improving the efficiency of the advice process. Advisers have been looking at different parts of their processes to identify where they have a competitive advantage. These are the parts that they should keep in-house and dedicate most resources. For the remaining processes, advisers should consider whether they are better outsourced.

Outsourcing investment to platforms and value for money

One of the processes that many advisers outsource is investments. That could include constructing portfolios and asset allocation for different investors, conducting research to select the right investment products and funds, or having a robust process in making investment decisions. While many wealth managers and advisers have access to ample information, they cannot devote lots of resources in-house to sort through all the information on markets, investment strategies and products, and arrive at the best decisions for their investors.

Currently, many advisers outsource the investment using platforms. Platforms are powered by online technology, hosting a wide range of funds and ETFs. Investment selection and purchase/sales can be done efficiently. But using a platform is unlikely to be sufficient to deliver value for money on the final advice. Even selecting platforms requires informed decisions on which provider to use, as well as monitoring to ensure it is working for the final investor. With the investment environment becoming more challenging, advisers need expert investment input from time to time on different aspects of investment that need tailoring to investors. These are not readily provided by platforms in a timely and relevant manner.

Take back control to enhance value for money

The focus on value for money also causes some advisers to rethink where the investment processes should sit. There is a trend these days to ‘take back control’, to bring more decisions in-house from external model portfolio service or DFM providers. That can increase fee income as well as make it easier to respond to investor needs.

But to take back control requires in-depth resources to do it properly and to assure end-investors and regulators that there is a robust process in place. One approach is to appoint non-executive directors and they can add to the process with monitoring and suggestions. But usually they are not continuously involved but rather watching as if from on high. And this may not be cheap, defeating the need to control cost to achieve value for money.

Personalised investment support – the concept of the investment buddy

As we can see, what advisers need is an independent expert to talk to regularly, as a sounding board. Providing independent ideas and suggestions. Offering views on economic developments and trends in markets, discussing risks and probing new products. Advisers need their questions directly answered, their queries investigated and assessed on a timely basis. They need someone familiar with the style and philosophy of the firm but knowledgeable about markets in general, about the competition, about how the investment landscape is changing. In short they need an ‘investment buddy’.

What is an investment buddy? Someone, or a team of people, with long experience of markets who can become part of the investment process. Rather than being consultants on a one-off project, the investment buddy has an ongoing partnership arrangement supporting the firm’s investment function.

A portfolio manager in a large bank or fund house has daily access to economists, strategists, product specialists and more. For advisers and wealth managers, the investment buddy can deliver similar input from independent specialists as needed. Filling in gaps in knowledge, offering different perspectives, doing research as required and above all, providing an independent view while nevertheless fully understanding the firm’s philosophy and approach.

By incorporating an investment buddy into their process, firms can access the same range and depth of experience as much larger organisations, while still retaining full control. Advisers can be assured that they are hearing about all the latest trends in the fast-moving investment space, whether on ESG, regulatory changes, new products or new approaches.

One key benefit of this ‘outsider inside’ approach is avoiding group-think which can be as prevalent in a small organisation as a large one, while at the same time being directly relevant to the firm’s needs. By maintaining regular contact, the investment buddy will come to know the firm’s people, its philosophy and approach so that they can provide targeted support. An investment buddy can also shake up entrenched ways of doing things which might need adjustment.  Lastly, as firms that have adopted this approach can testify, using an investment buddy can improve the firms’ business efficiencies and reassure regulators.

Most importantly, the arrangement of an investment buddy can be fully tailored to the firm’s changing needs. The investment buddy can provide reassurance that the firm is fully on top of managing investments in the best interests of investors, while freeing advisers to focus on giving the best advice, as well as on client acquisition and relationship management.

Main image: stephen-dawson-qwtCeJ5cLYs-unsplash

Professional Paraplanner