Morgan Williams & Co. was one of the early adopters of IMX, Nucleus’ new managed portfolio service. We made this decision as part of a broader strategy to make more of a move towards offering a full financial planning service for our clients. We believe the future of financial advice to be getting ever closer to clients and their objectives - in many ways IMX is a great tool that helps with this.

    You don’t have to go back very far to when advice was mainly product-led, geared around investing a set sum of money according to a formal objective. In recent years, however, the sector has come a long way. There’s a growing awareness that money isn’t the client’s ultimate objective. Instead, money is just a ‘battery’, a store of the client’s wealth to be discharged at the right moment.

    When I first joined the profession, I thought that the sort of objectives we as advisers were recording tended to be very formulaic. While they reflected what the client was asking for (growth or income) they didn’t reflect the client’s ultimate need.

    Over the past few years, we’ve started to move towards a much more financial planning-led way of working and getting to grips with the direction people want their lives to go in. We’re keen to overlap their finances as perfectly as possible with what they want to accomplish and the things they care about.

    The role of behaviour

    Under the traditional product recommendation approach, advisers and clients agree on what can be quite vague objectives for clients’ money, before they go through a risk questionnaire and perhaps a general conversation about how they feel about it. From that process, a portfolio is selected that the adviser deems to be appropriate. But when you start to unpick the rationale behind some of the investment decisions, even where complex risk mapping systems are involved, the justification behind, say, 40 per cent in equities rather than 50 per cent can be weak. Yet the difference in outcome over time can be significant.

    The industry tries to quantify risk based on a risk score, whereas clients don’t think about things in terms of ‘volatility’. As advisers, we don’t recommend lower-risk portfolios to stop people from attaining high returns. We do it to prevent them from making bad decisions when the value of the portfolio is falling. 

    We felt it would be useful for our clients to help educate them and to understand that investing is not magic. By demystifying it and confronting the real issues underpinning investment decisions, we can help them better handle the load at difficult moments, and help them make the right decisions at the right time.

    As a firm, we wanted to create a much straighter line from the client’s objectives to what they were ultimately recommended.

    IMX in practice

    I recently met with a couple in their 40s. They unexpectedly inherited around £600,000 from a parent, and had absolutely no idea what they wanted to do with it. But they did feel that whatever they chose should honour the parent’s memory and be spent in a way that would make them proud.

    We discussed their current situation and the things which would make their lives better. From that, we came out with a set of objectives, along the lines of:

    • wanting to send their children to private school
    • taking the family on ‘experience’ holidays, including a trip to see a SpaceX launch for their space-mad eight-year-old son.
    • wanting to help their children in future with a deposit for a house
    • saving for their retirement

    The conversation then turned to making all this possible: how much should they save, and how much money needs to go into each category.

    The IMX portfolio modeller tool, which is integrated with the Nucleus platform, was a valuable part of this discussion - demonstrating both quickly and easily the reasonable assumptions about what was needed for each objective.

    Client behaviour is central to getting the risk level right, and we spent an entire meeting on ‘making good decisions’. This helped them understand what traps existed and what mistakes they needed to avoid. It completely changed things from their point of view. Investing was no longer a magic box with a big question mark on the front, but they started to see it as long-term means of achieving their objectives.

    IMX allowed us to own different investments for each objective, name them according to the objective, and then assign the correct IMX portfolio. This creates a straight, clear line for our clients from what they want through to what they end up with.

    The advised vs discretionary approach

    Of course, this outcome could be successfully achieved with an advisory portfolio, but for us it wasn’t the right way to go.

    We believe the biggest problem with advisory portfolios is that they take the client conversation in an unhelpful direction. If I were to start talking about bond credit ratings and US mega-caps and where to target investment, clients’ eyes would glaze over. For many clients, the limited time we have together is better spent making sure they have formed their objectives clearly and that we have a comprehensive plan in place, rather than talking about the best way to gain exposure to the S&P 500.

    In our conversations with the couple mentioned earlier, the husband said he didn’t want to worry about his retirement and added he wanted his investment life to have “all the worries of Homer Simpson”. So on his suitability report’s objectives page, there’s a picture of Homer Simpson in a hammock. That’s what he wanted, so why translate that into something else?

    Why IMX in particular?

    There are many DFM services available. That said, we believe the IMX service brings together a combination of factors that appeal to us as a business.

    The IMX team’s starting point focuses on the areas where they can make the most significant difference. The emphasis is on genuinely adding value while keeping costs down to make sure the client gets the maximum benefit.

    IMX runs various portfolios up and down the risk levels, split in half for clients who are accumulation or at-retirement. This makes it straightforward to identify the correct portfolio which conforms to the clients’ objectives. With the example above, we set up investments for each goal, and using Nucleus’ platform technology gave each investment a ‘name’ relevant to that objective. At the annual review, this makes it simple to assess how each investment is performing relative to its objective and expectation, allowing us to recommend adjustments where necessary.

    The time that using IMX frees up in these reviews is time that can then be put to work in helping clients understand their current situation. This, in turn, helps them make better decisions and allows us to make sure their investments still match their objectives. It can also help our relationship with some clients to disassociate ourselves from the exact choice of underlying assets.

    The benefits for clients and for us

    Fundamentally, working in this way is about asking better questions and getting better answers. We want to steer clients away from solutions-based questions like “can I have a pension?” through to outcomes-based questions like “how much do I need to save to help my children onto the housing ladder” or “how much do I have to save to retire earlier?”.

    I think there’ll be advisers who choose not to go down the discretionary route not because they don’t think it’s a good idea, but because they worry that it renders their role in the process as a bit ‘woolly’ or ‘hippy’, and perhaps not worth the 75 basis points or whatever they’re charging. I don’t believe this is the case. I think forming better objectives and preventing behavioural mistakes alone justifies the fee, let alone the value-added in selecting DFM, tax wrappers, income strategies and platform. 

    When we got to the end of the process with the client couple, they described it as life-changing. They said they had loved going through the process and that it had completely changed how they viewed money.

    When we come back at the annual review, we’ll see how their objectives are progressing and make whatever changes are right at the time.

    I would argue this approach actually makes advisers and planners more relevant than they’ve ever been. The focus is not how much an investment has made over a given period of time, but rather to consider how reality has changed the chance of success of meeting a client’s objectives, or perhaps recognising that the objective has changed. This is where I believe we add the most value.

    Overall we believe investing is best achieved by straightforward principles, long-term thinking and low costs. IMX is totally compatible with this approach. It enhances our service by keeping our clients’ focus where it needs to be, and by giving us as advisers more time to spend on working out the best way to achieve clients’ goals. 

    James Evans BA (Hons) MSc FPFS CMgr MCMI
    Chartered Financial Planner, Morgan Williams & Co.
    April 2021