Financial advisers have always had to deal with scrutiny, whether it be from their customers or their regulators. Going forward this is unlikely to change and, indeed, if anything, is set to increase. With a 'chain only as strong as its weakest link', robustness and rigour must be evident at every aspect of an adviser’s process, including of course their approach to building investment portfolios, to ensure it can stand up to scrutiny, both now and in the future.

    Defining rigour

    An official definition of rigour is 'the quality of being extremely thorough and careful' and it is very much this definition we are thinking about when it comes to this article. To give a bit more investment context, rigour is also defined in the paper 'Lessons for Asset Owners' Clark/Urwin (2007). This paper focuses on a number of rigour related attributes that successful asset owners exhibit, and which have led to positive outcomes for their stakeholders. The chart below summarises the core attributes identified by Clark/Urwin. Each of these attributes are interrelated, and good governance must be embedded throughout the process. Let us consider each attribute in more detail.

    Governance

    Mission clarity

    In its simplest form, this can be instigated by asking ourselves 'What does success look like and how are we going to get there?'. However, it is not quite as simple as that. There are various factors that need to be taken into account to evaluate 'success' accurately. Such measures include the overarching goal(s), time period(s) considered, the impact of fees and other factors such as ESG beliefs. Successful asset owners have clarity on all these measures and are able to monitor their progress relative to them effectively.

    The need for mission clarity on investment portfolios is particularly important for financial advisers. It enables advisers to understand how their investment portfolios fit with their advice process and their clients’ needs. It also means advisers can clearly articulate how their portfolios and advice align to their regulatory requirements, most notably PROD.

    Strategic focus

    We have considered, in a previous article, the importance of investment strategy (which we define as being the split between different types of assets), with academic studies suggesting around 90% of a portfolio’s return variability can be defined by the choice of investment strategy.  

    The four important inputs into a successful strategic asset allocation setting process are:

    1. Alignment with the target objective, constraints and time horizon: e.g. if a client has a focus on making regular withdrawals then a strategy setting process which factors in sequencing risk is potentially more appropriate.
    2. Assumptions are all based on evidence: Any assumptions baked into process should be based on a reliable, trusted and appropriately sized dataset. These assumptions should also be aligned with the expected fees and route of implementation.  
    3. Sensible diversification: Combining different asset classes regions and sectors offers the scope to reduce risk but not return. However, aligned to the above point, the decision to combine them must be based on evidence, factor in costs and be transparent and explainable to underlying investors. 
    4. Scenario testing: Financial markets can be volatile, and returns will vary from year to year. All candidate strategies should be tested across a range of potential economic scenarios to identify the most robust given the portfolio’s stated objective.

    These aspects are all fundamental to achieving a successful and repeatable process to setting an investment strategy.

    Implement effectively and efficiently

    Once a strategic asset allocation has been set, the next stage, as set out by Clark and Urwin, is to implement it both effectively and efficiently. Consideration needs to be given to several areas, including determining the appropriate combination of active, factor and index-tracking management and appointing the managers that will be used to manage the mandates. Irrespective of the route of implementation selected, an understanding of all the costs and expenses associated with the funds is needed and investors should not be afraid to negotiate to achieve competitive terms for their clients.

    Good governance

    We also discussed governance in more detail in a previous article, including highlighting a quote from Keith Ambachtsheer, one of the leading voices in investment governance, who suggests that good governance can add between 1% and 2% in additional returns per annum.  

    In a nutshell, good governance could be described as - doing the right things, in the right order and having a willingness to reflect, learn and evolve. A willingness to reflect, learn and evolve is especially important as customer and regulatory needs develop and market conditions and product offerings change over time.

    Applying these criteria to IMX offering

    Institutional rigour is applied across the IMX proposition with the aim of achieving successful outcomes for advisers’ clients. We summarise how the core attributes we have outlined are evidenced in the IMX proposition:

    Core attribute How evident in IMX offering
    Mission clarity
    • It is an outcome-based proposition, with a broad range of desired outcomes and time horizons forming the basis for building the investment portfolios.  
    • Tooling is supported by Club Vita, the UK’s leading longevity data set giving evidence of life expectancy.
    • Clear alignment between a client’s objectives and their underlying choice of investment portfolios.
    Strategic focus
    • Bespoke investment modelling aligned with the target of objectives and time horizons. Thousands of candidate portfolios, each scenario tested 5,000 times to identify the most robust across a range of economic scenarios.   
    • Assumptions aligned to how assets are implemented. Assumptions based on latest market data, as well as long-term performance of asset classes. Sensible diversification across eight asset classes.
    • Repeatable process, using a consistent set of assumptions across the process, with a well-defined audit trail that can be communicated to clients.  
    Efficient and effective implementation
    • A combination of active, factor and market cap index tracking give both return potential and risk reduction at an affordable cost. The equity element includes climate aware fund supporting the sustainability of the portfolio.
    • Best in class investment managers appointed following detailed selection process, including testing the managers’ approach to responsible investment. Hymans Robertson’s £250bn assets under advice institutional buying power help achieve preferred share classes and competitive fee rates. 
    • Portfolios are low cost, transparent and well diversified which will improve net of fee outcomes.
    Good governance across all elements
    • IMX’s dedicated investment team, with its delegations and external support, allows key decisions and analysis to take place on a timely basis.
    • A diverse investment committee provides strong challenge and robust oversight to investment decisions, reporting and business planning.
    • Learning culture embedded in organisation. Ongoing desire to evolve the proposition to improve customer outcomes.

    William Marshall,

    Partner, Hymans Robertson

    Risk warning: This communication has been approved and issued by Hymans Robertson LLP (HR) on behalf of Hymans Robertson Investment Services LLP (HRIS) and is based upon their understanding of events as at date of publication. It is designed to be a general summary of topical investments issues, it does not constitute investment advice and is not specific to the circumstances of any particular financial advisory firm. Please note where reference is made to legal matters, HRIS is not qualified to provide legal opinions and you may wish to seek independent legal advice. HRIS accepts no liability for errors or omissions.

    Please note the value of investments, and income from them, may fall as well as rise. This includes equities, government or corporate bonds, and property, whether held directly or in a pooled or collective investment vehicle. Further, investments in developing or emerging markets may be more volatile or less marketable than in mature markets. Exchange rates may also affect the value of an overseas investment. As a result, an investor may not get back the amount originally invested. Past performance is not necessarily a guide to future performance.