Your investment solutions

Investment research and returns aren’t what clients value most in you. The trend towards outsourcing of investment solutions continues among Nucleus users, with future usage of DFM MPS set to increase strongly.

However, advisory-built models are still very popular as some wish to stay in full control of these decisions. ESG usage remains relatively low, but many see this as a process to be embedded in any investment decision. Additional costs and a loss of returns for those using ESG solutions will not be tolerated.

Consistent centralised process

Most Nucleus users run a centralised investment proposition (CIP), with just over half running a centralised retirement proposition (CRP).

Having a centralised approach brings a consistent, repeatable process for your firm and can help justify why differing strategies may be applied to different clients. It can also help narrow the choice when selecting a new platform, with those unable to offer particular types of investment solutions immediately discarded. Like platform due diligence, it’s important to keep these under review and it’s interesting to see the most common frequency is to review continually, done by around two fifths of users. The investment process is an important part of an advisory business, so what drives a review of this?

The two biggest drivers are performance and price both cited by over 80% of users. Clearly both are important and increasingly visible to clients, so it’s right these are top of your criteria. And, of course, your aim is to provide a process that will enable clients to fulfil their financial goals, so it’s great to see firms firmly invested in this as the third biggest driver.

How often is your CIP reviewed?

Which factors are most important to you when undertaking due diligence on a CIP?

Your investment strategies

Usage of a mix of investment strategies is apparent with the three most popular solutions (DFM MPS, multi-asset solutions and own model portfolios) all employed by around 60% of users.

DFM MPS and multi-asset solutions are clear examples of outsourcing where the adviser plays no part in any rebalancing process, therefore freeing up time to focus on advice, or for lighter touch clients. Advisory model portfolios increase risk to the business and of course require additional checks and balances to be performed, but clearly allow the firm to take control of the investment solution and are a driver for margin.

The usage of these solutions is varied. 71% of those employing their own model portfolios say a high proportion of client money is allocated to this solution. This is to be expected as clearly the firm believes in their own investment process and has tailored this to their client requirements. The reverse is true with multi-asset funds where 86% say a low proportion of client money is allocated, evidencing an element of blending with other solutions. DFM MPS shows split usage, with many allocating a low proportion of client money, suggesting they’re uncomfortable with the DFM being the sole decision maker, or only use them for a particular client segment. Others clearly have no issue with this and are comfortable allocating a high proportion of client money here. Perhaps the more interesting aspect is the net future use (the percentage who say they’ll increase usage of this solution, minus those that say they’ll reduce usage).

DFM MPS on the up

Future usage of DFM MPS is the only solution within the top three to see a net increase, with 30% of users expecting to increase usage and only 2% set to reduce.

This shows the outsourcing model is set to continue for many Nucleus users. The reverse is true for adviser-built model portfolios. Despite high current usage and a high allocation of client money, over a quarter of users are set to reduce usage. Clearly many have assessed the opportunity costs of the time spent building, executing and maintaining their own portfolios.

Outsourcing investment solutions

Investment research and returns aren’t what clients value most in you.

It’s about making sense of it all through the planning, coaching and communication you provide. That’s why almost three-quarters of Nucleus users opt to outsource the investment decision. As coaching becomes more prevalent and advisers are spending more time with clients, it’s easy to see why. Investment managers provide the sufficient expertise to remove the research from the adviser. This creates additional time, cost and resource savings, and allows the adviser to focus on what they do best: advise clients. Also, when outsourcing to a DFM, price remains the largest driver, suggesting excessive DFM charges may be under pressure.

If you outsource the investment decision, what are the main reasons for doing this?

If you use outsourced DFM model portfolios, what factors do your firm consider when selecting?

Environmental, social and governance investing (ESG)

ESG continued to create headlines across 2020 and beyond. There’s clearly appetite for this, as less than one in 20 responses believed none of their clients wanted to make a positive impact via their investment.

However, only around one in ten believe more than half of their clients wish to do so, suggesting this is still reasonably immature. Articulation of the values clients would like reflected in their investments has split users almost entirely down the middle. However, it would appear more about the environment (so what do the companies do rather than how they do it). From an investment perspective this approach can be easier to run and research with industry classifications such as arms, fossil fuels etc widely available. The “how do firms operate” approach might cover a multitude of factors (environmental impact, social and human rights etc) which are less binary. Maturity in the market may bring solutions that help with some client’s articulation of what ESG values they would like reflected in their investments.

What % of your clients want to make a positive environmental and social impact via their investment?

Do clients typically understand what values they would like reflected in their investments?

Typically, what broad areas of ESG are most important to your clients?

What level of return would your typical client be willing to sacrifice to reflect their values?

Embedded, not expensive

There’s an over-arching feeling clients may expect to give up a little bit of their returns to accommodate their values, but many still clearly believe ESG should be an embedded part of the investment process, therefore have no impact on returns.

Next… chapter six

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© Nucleus Financial Services Limited 2021

Nucleus Financial Services Limited is authorised and regulated by the Financial Conduct Authority, is registered in England with company number 05629686 and has its registered office at Elder House, St Georges Business Park, Brooklands Road, Weybridge, Surrey KT13 0TS. Please note that telephone calls may be recorded in order to monitor the quality of our customer service and for training purposes.