December 2007
One of the more notable developments in
the wealth management industry is the move to what is often called
an ‘open architecture’ approach. This means instead of selling
specified financial products, progressive financial organisations
have the flexibility to provide a discretionary or advice-based
approach and offer a full range of services from an extensive
choice of industry providers.
However, having more choice is not always an
advantage. Faced with so many complex investment options and
increasingly uncertain markets, it is understandable that more and
more people are now choosing to delegate the day-to-day management
and administration of their investments to someone with more
experience. Many potential investors are now looking for a
qualified investment professional who will work closely with them
to tailor an appropriate investment portfolio, and then manage it
for them.
This approach is known in the industry as a
discretionary investment management service. To put it simply, the
client gives the investment manager the authority, or the
discretion, to make day-to-day investment decisions on their
behalf, without obtaining prior approval on every occasion.
Clearly, this type of service is ideal for those who do not have
the knowledge or time to manage their own investments, or just
prefer not to.
If a client is to entrust the management of
their portfolio to an investment manager, it is vital that the
manager and the client share a mutual understanding of their
financial objectives and how the wealth should be managed. A
relationship manager should work with each client to identify their
personal attitude to risk and their own specific investment
objectives. Attitude to risk can be influenced by a number of
factors such as: age, income, spending patterns, anticipated
capital requirements and the proposed duration of the
investment.
A client’s portfolio should always be
structured to meet a level of return appropriate to reward them for
taking a defined level of risk. Once a portfolio is constructed, it
should be monitored and adjusted to ensure that an acceptable level
of risk is maintained in accordance with any changes in
circumstances or objectives.
Once the risk parameters and investment
objectives are met, I believe there are three fundamental
principles for constructing a well-balanced portfolio:
- An effective asset allocation approach has been proven to be
the key to successful investment performance.
- A broad asset allocation spread across a range of asset classes
diversifies risk and maximises the opportunities to deliver
attractive risk adjusted returns.
- Passive or index tracking funds will often outperform actively
managed funds in efficient markets and have become central to
investment planning by offering ‘market’ returns at minimal
costs.
To put these basic concepts into practice and
deliver strong returns relative to the level of risk taken, I
prefer a flexible ‘core and explore’ approach to portfolio
construction. This aims to combine a central ‘bedrock’ investment
with a series of more specific investments that can be selected to
reflect an investor’s particular interests and attitude to risk.
The long-term ‘core’ holding should be suitable for a broad range
of investors seeking to capture investment returns within a tightly
risk-controlled environment. Diversification can be achieved by
investing across all the major asset classes, including cash,
bonds, commercial property, equities and alternative investments
(such as commodities and hedge funds).
Then, in an effort to increase returns,
clients who are prepared to take more risk can employ short-term
tactical strategies as ‘explore’ investments to take a more active
investment approach and to reflect current market themes.
Once an investor’s needs and objectives have been agreed, the
investment manager has the opportunity to develop favoured themes
in conjunction with their client.
A client’s longer-term objectives and tax
needs should also be considered and integrated into the investment
process of a discretionary management service. An effective
solution for long-term investment planning can be to integrate the
service within an appropriate wrapper or pension structure. This
can include a ‘pension wrap’ to provide a self-managed pension
solution.
In conjunction with a local pension
specialist, Fairbairn Private Bank can offer Isle of Man residents,
or international expatriates, a tailor made pension service that
provides an attractive alternative to a life policy. Developing a
discretionary portfolio within a pension wrapper may provide the
benefits of tax relief on the contributions, and offer an
invaluable alternative to the restrictions of traditional annuity
purchase schemes.
With considerable flexibility of
contributions, a wide choice of investments and the freedom to
retire as and when a client chooses, combining a discretionary
investment management service within a pension wrapper can create
an ideal “lifestyle” planning solution.