CASE STUDY – A NEW PAY-AS-YOU-GO IFA DFM SERVICE

This case study outlines how we worked with an IFA to design and implement a TAILORED PAY-AS-YOU-GO DFM SERVICE. It provides an overview of the initial brief, what we did to fulfil that brief and the outcome for the IFA.

OVERVIEW

The IFA provided their clients with an advisory portfolio service, as part of their strategic financial planning proposition. The advisory portfolios were provided by an investment research and management firm. Once invested in an advisory portfolio, clients had to wait for their next annual review before their portfolio was changed to the latest version.

The IFA was a specialist in advising clients near and post retirement. They viewed their advisory portfolio service as suitable for clients in the accumulation phase but potentially not suitable for clients in decumulation phase. They thought that the combination of ongoing portfolio withdrawals to provide these decumulation clients with income and the risk of clients’ portfolio receiving lower or negative returns early in the decumulation phase, when these withdrawals were being made, meant that a different investment management approach was required. One that would be more active and diversified.

The IFA also thought it was important for the decumulation portfolios to be discretionary managed to enable the investment manager to make timely asset allocation and changes as and when required to clients’ portfolios rather than the client having to wait for their next client review to receive these changes, which would be up to 12 months later.

In summary the financial adviser firm’s requirements were…

  • A new discretionary portfolio service
  • Suitable for clients in decumulation or approaching decumulation
  • A more active and diversified investment process
  • Available on their chosen platform

 

WHAT WE DID

First we arranged a discovery meeting to gain a detailed understanding of the IFA, their client proposition, their existing advisory portfolio service and their requirements for this new discretionary portfolio service.

Then we talked the IFA through our 6 step process for IFAs when considering introducing a discretionary portfolio service.

 

Step 1

Client Segmentation

Step 2

Design Criteria

Step 3

Short List Criteria

Step 4

Engage and apply due diligence

Step 5

Implementation and Transition

Step 6

Investment Governance and Ongoing Suitability

 
In STEP 2 DESIGN CRITERIA we established the target overall cost for the new discretionary portfolio service, which included the IFA’s adviser fee, the platform cost, and the portfolio costs. We confirmed with the IFA that their decumulation clients’ portfolio needs could be met via a range of four portfolios held on the platform used by the IFA, subject to an analysis of the funds available from the platform versus the optimum funds identified by us for these four portfolios.

As part of STEP 3 SHORT LIST CRITERIA we provided the IFA a full investment walkthrough identifying what we do, why we do it, why we are different and what that mattered for a decumulation service. The IFA could see clearly how our more active and diversified investment process worked through the different challenging economic and market time periods, as shown through our portfolio stress testing and how that would work well for their clients in decumulation.

Having agreed our investment process met the brief we worked with the IFA to identify four portfolios that would meet their requirements. The IFA required three risk rated portfolios and a fourth matching the higher risk rated portfolio but a passive only portfolio. We assessed the optimum funds we wanted to fulfil the four portfolios against the fund range available from the platform provider. Several funds were not available and had to be replaced. This was not a simple one for one fund switch. Our Head of Funds Research had to complete some quantitative analysis to identify what funds in combination could achieve closest to the objectives of the optimum funds not available on the Nucleus Platform. Once this was done the four portfolios were ready to be loaded onto the IFA’s Platform.

To compete STAGE 3 SHORT LIST CRITERIA we also agreed…

 

  • The IFA would position the new discretionary management service as their own branded investment proposition with us providing the investment engine.
  • That we would provide regular investment governance, through co-forming an investment committee to meet quarterly.
  • That that the IPS Capital CIO would decide when changes were to be made rather than having a periodic rebalance and that all investors in each portfolio affected would receive those changes.
  • The portfolio information that would be contained on the four monthly portfolio fact sheets that we were providing.

In STAGE 4 ENGAGE AND APPLY DUE DILIGENCE we provided the IFA with a range of due diligence documents, including…

  • Our approach to investment selection & due diligence
  • Our Terms and Conditions & charges
  • the availability of funds, tax wrappers and other products (i.e. investment flexibility)
  • Asset classes
  • Functionality
  • Support services

They also completed independent due diligence of their own. This included looking at the discretionary portfolio service offered by their existing provider. In addition a risk mapping exercise was completed identifying which risk profile outputs from their risk profiler the four new portfolios matched closest to.

The Financial Adviser firm’s decided their requirements were being met

  • A discretionary portfolio service
  • Suitable for clients in decumulation or approaching decumulation
  • A more active and diversified investment process
  • Available on their chosen platform

They signed our IFA Agreement and we moved to STAGE 5 IMPLEMENTATION AND ADOPTION. Here we loaded the four portfolios onto the chosen Platform and the IFA began using the new decumulation discretionary portfolio service. We provided support information for suitability letters, including performance and risk/ return charts. The IFA began to use their new discretionary portfolio service where appropriate for their clients. We did not set any annual AuM minimums. This was a PAY-AS-YOU-GO IFA DFM SERVICE

After three months we moved to STAGE 6 INVESTMENT GOVERNANCE AND ONGOING SUITABILITY. We held an investment governance meeting with the IFA and completed the first rebalance. From this first few months there were a few teething issues that required resolving, which we were able to do so quickly with minimum disruption to the IFA’s clients.

OUTCOME

The financial adviser firm’s requirements were all met

  • A discretionary portfolio service
  • Suitable for clients in decumulation or approaching decumulation
  • A more active and diversified investment process
  • Available on their chosen platform

The financial adviser now has a differentiated decumulation discretionary portfolio service that meets their and their clients’ needs. They have an investment partner that is fully supportive.