In most financial advisory practices there are planning, advisory and investment risks that can go unattended. Left unattended these risks can and will materialize into significant business risks. With the continued increase in regulation for financial advisors and with particular reference to FAIS, TCF and RDR it is now more than ever essential for Advisors to have professional help in choosing which managers and funds to recommend to their clients.
Assuming the Advisor has done a thorough due diligence of their clients investments and have established a list of funds they are currently invested in, then the task of researching and creating professional solutions can start. Our experience suggests that this analysis will reveal that there are vast numbers of small allocations to many different funds.
In most modern advisory businesses there is a financial planning and investment planning process that results in certain target return outcomes for clients, these are most often represented as Inflation Plus numbers (CPI+2,4,6,8) or Cash Plus numbers (Stefi+1,3,5,7).
The idea of the Short List funds is to provide suitable, well researched, fund solutions to match the target returns or outcomes identified in the planning process. It is usually also the intention that per category an advisor should select any one fund from the short list to satisfy the need. Fund, Strategy and Style Diversification benefits are better achieved in a Guided Architecture or Model Portfolio environment. It is not the intention that the funds on the short list will necessarily change over time, but this is almost inevitable.
The Investment Managers job is initially twofold, first to identify and create strategic asset allocations for each of the targeted outcomes and secondly to identify funds that closely match the strategic asset allocations and or target returns.
Once the universe of funds has been established the Quantitative Research process kicks into gear. This can involve several phases and usually a number of analysis tools including proprietary ones are used to screen and grade the funds in each group. This analysis typically looks at, returns, volatility, alpha generated, duration of fund histories and consistency of performance. Ranking of Funds based on the selected criteria will be an output.
Between 10 and 15 funds per category will then be drawn through to the Qualitative Research stage. This stage involves interaction between the researcher and the fund and its manager. Typically each fund and or manager will be asked a number of critical operational, skill and knowledge, style and activity based questions. The answers to these questions will be cross referenced to the information publically available and any discrepancy addressed.
In this phase “Red Flag” events may be identified. A Red Flag would typically result in the fund being removed from the prospective short list. Qualitative Research is the Art where Quantitative Research is the Science of the Research Process. Once the research has been completed the Qualitative score will be added to the Quantitative score and a revised ranking will be created. Each fund on the Short List will have a series of reports published on a regular basis and made available to the advisor to use in the advice process. In each category the top 3-5 funds should make it onto the short list of funds recommended by an advisor. A reserve list of recommended funds also equalling 3-5 per category is also made available. These are funds that need not be switched from at this stage.
Short Lists are updated quarterly and any changes will be fully documented and distributed. Funds are continuously monitored for Red Flag events that may results in ad hoc interventions. When a Red Flag event occurs all advisors will be advised.
There is no definitive way to implement short list management into a practice, however FAIS requires an advisor to engage with his client on a regular basis and RDR may well insist that an advisor can only earn advice fees if they renew their contract with the client annually. If we follow this theory the implementation of the short list into the client’s portfolio should occur within one year.
When reviewing the clients portfolio annually Advisor will recommend switching out of funds not in the recommended or reserve shortlist into the short list funds. This process will be dynamic and ongoing as from time to time the Short List Funds may and will change.
Advisors can implement other risk management tools into their businesses to monitor the success of the Short List strategy.
Seed is an independent Multi-Manager Investment Company with extensive manager and fund research skill and experience. In addition Seed also has the skill and experience required to blend manager skills and mandates to achieve the benefits associated with style and asset class diversification.
Utilising industry standard and proprietary analytical tools and with over 700 manager meetings already completed Seed provides a wealth of skill and experience ideally suited to managing Recommended Fund Short Lists for Financial Advisors.The team currently has six investment professionals with a dynamic mix of qualifications and experience including CA’s, CFA’s and FASSA (Actuary’s). In addition to the Research capabilities the team manage and advice on Multi-Manager Collective Investment Schemes, Fund of Hedge Funds and Model Portfolios both locally and globally.