Author: Tom Wiseman, Managing Director, Enhance London
I was asked a particularly poignant question by a private client solicitor over lunch recently that I thought I’d share more broadly;
‘Tom: when so many Investment Managers nowadays are similar in terms of style and past performance, why should I pass on the cost of an Investment Consultant to my client when I could make a reasonable fist of a beauty parade and portfolio oversight myself?’
It’s a very fair point and a hot topic in the fiduciary community. After all, it doesn’t take Warren Buffett to identify four or five household names in the investment management industry and invite them to a beauty parade to flaunt their wares to a prospective client.
The UK, in particular, is a very well regulated financial services market and it is not unreasonable to assume that established investment management houses with demonstrable track records will do a perfectly adequate job for clients without the need for any intermediation from a consultant.
Add to this the very helpful tools available to fiduciaries such as STEP’s TMPI Focus List and similar peer group studies, and most Trustees can discharge their fiduciary responsibilities and secure a safe pair of investment hands for their clients following some sensible due diligence.
After a manager (or managers) have been selected for a client, their portfolios can be monitored via an inexpensive independent reporting service against appropriate benchmarks (such as STEP’s TMPI) and an annual review meeting between all interest parties to assess ongoing suitability.
My response to my lunch companion’s question was that Trustees should only use an Investment Consultant where they can add a layer of investment expertise and value that exceeds the fees they charge. A consultant is particularly helpful where clients require one or more of the following facets of service:
– A primary, independent strategic investment adviser for their global affairs
– Portfolio construction that accounts for ethical, structural and tax considerations
– Research based manager selection, diversification and implementation
– Consolidated, multi-account performance reporting with detailed analysis
– On-going monitoring of adherence to a defined Investment Policy Statement
– Fee negotiation with various counterparties
This is not an exhaustive list of potential service requirements, but it does outline key areas where consultants add value to client investment arrangements. The overarching benefit of consultancy is that clients have an independent, well researched investment professional on their side of the table, acting in their best interests. The probability of better risk adjusted performance is increased.
If we do our job properly, a ‘beauty parade’ of household names turns into a tender process of well researched and suitable investment managers for a sensibly constructed Investment Policy Statement. Fee negotiations go from a standard retail tariff to institutional rates, given our intermediated economies of scale. Ongoing oversight changes from manager performance reporting to detailed independent analysis, delivered in appropriate language to the client by a well-informed investment professional.
My hope is that if Enhance only engages with clients that we genuinely feel we can add value to, then this should lead to mutually beneficial long-term relationships with the Trustees we serve. If there is a strong argument to DIY for a client, we will tell you.