Using tools is a two-way street

Asset allocation and portfolio modelling tools have been one of the great technology success stories of the past five years.

They allow advisers to move away from traditional managed (and with-profits) funds and provide a higher level of investment advice to clients.

However, there has been a great deal of comment over the past few months on the subject of tools. They even receive a mention in the RDR (DP 07/2 Section 7.2).

The issues can be divided in three categories:

• Do advisers understand tools and their outputs?
• Are providers changing tools to suit the funds on their own platforms?
• Are advisers becoming too dependant on the output of tools?

Turning first to adviser understanding, there is clearly a shared responsibility; as DP 07/2 makes clear, providers have an obligation to ensure the information provided is accurate and clear, and intermediaries have a responsibility to understand what they are using.

As a supplier of such tools, we have been working with providers, advisers, and other suppliers to improve the quality of communications and dispel some of the myths about what tools do.

The outputs of the work will be published soon, and I will be covering some of the common myths about risk profiling, asset allocation and fund selection in future blogs.

The important message for advisers is; be demanding - make sure the platform, provider or supplier which offers the tools you use gives you the information you need in the form you require it.

But who is in control? Providers who make tools available to advisers can sometimes change the ‘factory settings’ of tools, such as the asset allocation, and, understandably, many advisers have questioned the reason for this.

The most important point to make here is that asset allocation cannot be used to discriminate between two funds with an identical asset allocation.

Our view is whilst asset allocation is an important factor in selecting investment funds, the choice of fund manager is best accomplished by a process which includes qualitative and quantitative due diligence, with the former performed either by adviser themselves, or by a third party such as OBSR.

Simon Farrant is head of financial planning at Distribution Technology.

Any views expressed in this article are those of its author and do not necessarily represent those of IFAonline or any other Incisive Media affiliated organisation.