Investments: The way forward

Personal finance decisions and providing financial advice have become increasingly complicated over the last decade. Changes in the areas of investments, fraud prevention, tax and credit legislation, to mention a few, have all contributed to this. In most cases these changes entailed improvements in the way the industry operates.

Very few investors have access to a specialist in each of the above mentioned competencies, and investors have therefore tended to rely on their financial advisors for this guidance, which has resulted in increased pressure on financial advisors to equip themselves to be able to offer counsel in these specialist areas. Businesses that accurately anticipated these changes in the financial services industry, and developed holistic financial planning practices, have consequently been largely successful.

One outflow of these holistic financial planning practices has been the creation of independent broker fund of funds (FoF).

Most broker fund of funds offer clients considerable value in terms of integrating strong investment capabilities and efficient tax and financial planning competencies, all packaged into a cost-effective and tax-efficient product that can be used for retirement funds and discretionary investment portfolios.

The so-called “broker funds” ensure that financial advisors are no longer expected to manage diverse client portfolios on a daily basis, which leaves them to do what they do best – financial planning. The asset management function is performed within the broker fund by, preferably, an experienced independent multi-manager who manages the fund on a daily basis. The financial advisor is left to add value in other areas, for example, tax and/or estate planning.

On the surface, this may not look like a different approach to grouping independently selected third party funds together, but keeping in mind that broker funds are often managed according to specific long term financial planning objectives, and in accordance with the financial planning philosophies of the practice, the client is assured that his specific cash flow and retirement objectives are being considered on a daily basis.

In broker funds, financial planners no longer run the risk of exposing their clients to potentially inferior collective investment portfolios, as the function of selecting fund managers is performed by the appropriately skilled multi-manager. These multi-managers apply quantitative and qualitative techniques in manager selection and ensure that the whole process is structured and documented.

Client investments are bulked in order to benefit from more aggressive fee discounts, and financial advisors have immediate access to all information that may assist them in enhancing service to his/her client. The key here is that the broker fund should be dedicated to reducing the management costs of the funds (TERs) and have sufficient assets to negotiate with fund managers to achieve that.

In order to achieve diversification and reduce risk, fund managers with different views on asset allocation methodology and views regarding sectors rotation, stocks picks, and mandates followed, are all considered in putting together a well-balanced fund of funds. Blending these managers into a single basket of funds will reduce performance volatility over the short term without imposing on the long term growth proposition.

However, not all fund of funds are created equal and some of the aspects that should be considered in choosing an appropriate fund of fund are:

  • The fund’s total expense ratio (TER). A fund with an excessively high TER may impact adversely on long-term performance. However remember that not all funds are structured the same: some funds may, for example, account for advisor compensation within the portfolio where other funds will require the investor to pay the fee outside of the fund.
  • Evaluate the process behind selecting the underlying managers. The process should be robust but not without protective restrictions. The mandate of the multi-manager should agree with the investment objectives of the investors.
  • Evaluate the long term performance track record of the underlying fund managers. This should provide the investor with an indication of what his investment should deliver over the long term.
  • Evaluate the risk profile of the fund as this would provide insight into the performance variance of the portfolio.
  • Opt for broker funds that have adequate assets under management to negotiate aggressive rates. Where broker funds are too small, rebates are likely to be inadequate in combating costs.

Conventional benefits from investment in multi-managed funds include:

  • “Best of breed” asset managers are combined in a single portfolio with a specific objective.
  • The successful integration of the right managers leads to diversification.
  • Short-term performance volatility can be reduced without imposing on the long-term growth prospects of each underlying manager.
  • Performance consistency is enhanced.
  • Bulking of assets enables cost-effective structure by negotiating lower underlying portfolio fees and/or rebates.
  • There are CGT benefits for discretionary investors.
  • The multi-manager can act quickly on a large asset base without the risk of neglecting the interest of a “forgotten” client.

In addition, independent broker funds may offer the following benefits:

  • Independent fund selection: where financial advisors are associated with practices with their own single managed portfolios, clients are often force-fed in-house portfolios. Independent broker funds will implicitly trust the multi-manager’s due diligence to make fund choices
  • Fund objectives are matched with financial objectives and cash flow requirements of the investor.

To conclude, industry developments have necessitated the introduction of products that address investor needs holistically. For this reason independent broker funds can offer remarkable value.

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