When contemplating investment management solutions, what if we ignored the noise for a moment and thought about value? London transport provides a good analogy.
London’s cabbies must be the DFM of public transport. You are probably going to pay more than on the bus or on a bike, but armed with ‘the knowledge’ and given a reasonably accurate description of where you want to go, there is a very good chance of you being dropped exactly where you need to be. You might have an interesting conversation too. DFMs, like cabs, are at their most valuable when it is raining and you are lost.
The bus fits the role of model portfolios. Cheaper than a cab, they will get you most of the way, but you might have to walk the last bit. This is great if you don’t mind putting a bit of extra work in: you know exactly where you are heading and it’s not raining.
The bike is your DIY investor. It might be the cheapest solution and can be enjoyable, but it’s not free, takes some effort and could leave you in a rain soaked mess if the weather is extreme.
Most people have tried these forms of transport, know the pros and cons, and use them appropriately.
So what has this go to do with cost, value and investments? Actually a great deal. If you know what you are paying for, and all or most of the services you are paying for are relevant to you, then there is a value. If you don’t need everything the cost will feel too high.
If you are planning to invest with a DFM you will have a wide range of services beyond bespoke investment management, including custody, high quality service, valuations and reporting, online access to your portfolio and maybe even short term lending.
If you are buying a model portfolio run by a DFM on a platform then the cost of the DFM will be lower, but you (as the client) are still going to pay for custody, valuations and reporting, service, online access, and (on some platforms) a lending facility, so the overall cost may be similar.
So if you can get the same investment manager cheaper, you always buy the model portfolios, correct? No, you shouldn’t, and I believe this is the crux of one of the FCA’s regular mantras about shoehorning clients into unsuitable solutions. It leads me back to my transport analogy.
Assuming a client wishes to travel, and there is a bus stop directly outside their house and destination, the bus is perfect, simple and cheap. If the situation is more complicated it might be appropriate to pay for a more expensive service and call a cab.
The flaw in this plan comes when you don’t give the driver enough information to do the job well. Asking a DFM to run a balanced portfolio is like asking a London cabbie to take you to the airport – he has five to choose and you have a slim chance of getting lucky.
Model portfolios are great when they match the client’s goals; bespoke portfolios are incredibly valuable if the mandate accurately reflects the investment objectives. However, the industry has some work to do to define and meet these objectives. I don’t believe any clients’ real objectives are ‘to beat a balanced index net of costs over five to seven years’.
Matt Lonsdale is head of intermediary business development at Thomas Miller Investment. The views expressed here are his own.
