Better Business: The complete package

Packaged investment solutions can help IFAs meet their RDR responsibilities. Here, Mark Parry, director of strategic distribution at F&C Investments, explains how.

The Retail Distribution Review (RDR) has fundamental implications for financial advisers, calling for evolution of their business models to meet the requirements of a post-RDR world.

RDR requires IFAs to position themselves firmly in a client service camp and advisers face a number of challenges. If RDR proposals come to fruition, there will be a seismic shift away from generating income through commission and towards pre-agreed charging structures aligned with levels of advice and ongoing service provision individual clients need. In short, the revenue an adviser generates from individual clients needs to be more reflective of the time and effort spent.

The good news is that growing investment solutions exist to free up advisers' time to concentrate on service, rather than on the time-consuming process of choosing individual investments themselves. Packaged investment solutions, such as F&C's Lifestyle Portfolios, can help IFAs meet their RDR responsibilities, by offering a complete core solution product that leaves advisers with more time to concentrate on what research tells us clients value most - financial/tax planning advice and effective ongoing servicing.

According to Jon Everill, proposition director at Bluefin, RDR will polarise the IFA between high-touch service providers and low-touch solution providers - both will have to transact business in a professional, efficient and compliant manner to prosper.

Identifying groups of clients

There is a sound business rationale for identifying groups of clients with similar characteristics before looking at which investment solutions suit best. The benefits of adopting a clear investment proposition are based on three key elements - an effective client segmentation strategy, a robust investment process and an ongoing service level agreement. Mark Pittaccio, investment director of In Partnership, believes there is now a clear business imperative to move from a cross subsidy approach to one aligned with an agreed value proposition for each client segment.

To determine the most logical categories for clients, an effective strategy should be based around the 80/20 rule -20% of clients will usually bring in 80% of revenue. It therefore makes sense for advisers to focus primarily on that all-important 20% and identify a lower maintenance, compliant solution for the remaining 80%.

‘Lifestyle' funds can offer an excellent core solution for less profitable clients, freeing up time to focus on the most profitable 20%. Lifestyle can also be used as a core or mainstream element of more sophisticated clients' portfolios, leaving advisers time to research and recommend additional satellite holdings to add diversification. Clients will typically fall into the four categories illustrated in Figure 1.

Advisers will likely have a large number of dormant/legacy clients contributing far less than a smaller number of high net worth individuals, with the remainder sitting in between. From a business perspective it makes sense to focus attention on the more profitable As and Bs, but the increasingly stringent regulatory environment means the ante has been upped in terms of what is expected in service provision and ongoing monitoring - including ensuring that investments remain ‘suitable' in line with clients' risk profiles.

Legacy clients are likely to contribute very little to overall profitability but by implementing a suitable investment strategy for each client base, advisers can potentially transform segment C and D clients into real contributors, meet ongoing TCF/RDR requirements and, crucially, help free up resources to focus time and effort on clients with greater profit potential.

Jelf Group is one such adviser firm who recently reviewed its investment proposition and found that detailed segmentation of the existing client base was key. Martin Bowles, managing director of Jelf Private Clients division, says: "This will provide a foundation on which to develop appropriate investment solutions by client segments which are fit for purpose, delivering quality investment management and consistent levels of ongoing servicing".

A consistent approach

Advisers who adopt a robust investment process at the heart of their business will provide greater consistency to their investment approach and ensure the client proposition is delivered in a commercially viable way.
Lifestyle, or risk-profile driven funds, follow the principle of diversification by investing over a range of different asset classes - equities, bonds, property and cash - via a fund of funds portfolio. They are multi-asset portfolios designed to maintain a predetermined level of risk to suit different types of investors based on their own individual attitude to risk.

The majority of ‘lifestyle' funds follow the same basic theory of matching asset allocation with a client's attitude to risk to a ready-made portfolio which holds an appropriate balance of investments across the asset classes. The client's attitude to risk is measured via a risk profiling tool and responses determine their risk profile on a scale of one to ten. Each risk profile has an associated asset allocation and ‘lifestyle' funds are typically based on the most common profiles.

The benefits of this type of investment are obvious. Building a bespoke portfolio of funds for each client is a labour-intensive task for even the most experienced of advisers. With a ‘lifestyle' fund, hours spent researching and building the portfolios is already complete, with funds selected from across the whole industry.

In Partnership are in the process of developing an investment proposition focused on an independently researched suite of outsourced investment solutions such as ‘lifestyle funds'. They believe this type of solution will allow advisers to concentrate on tailored financial plans for their client and facilitate more effective client servicing by harnessing the expertise of investment professionals".

Additionally, ‘lifestyle' funds are typically re-balanced at periodic intervals and asset allocation is adjusted in line with any movement in the portfolio away from the original risk profile. With due diligence being carried out by the product provider, this negates the need for advisers to monitor portfolios and ensures that clients are not unduly exposed to risk. Jelf Group adopted ‘lifestyle' funds as the proposition fit perfectly with their preferred risk profiling approach and delivered a "light touch, high feel" approach.

Add ongoing administrative support - provision of marketing materials, reports and regular up-dates - and ‘lifestyle' funds can offer advisers an end-to-end investment solution that frees up valuable time. Jon Everill at Bluefin says: "We adopted a ‘lifestyle' proposition via F&C's range as the philosophy was largely similar and allowed us to spend more time with clients".

Charging structure

In a post-RDR world, while advisers are justified in charging a higher fee to clients with more complex needs, they need to find an efficient way of charging the remainder to ensure their business remains viable.

Indeed, Mark Pittaccio at In Partnership believes that "linking appropriate levels of adviser remuneration with each solution should ensure that clients feel they are receiving value for money".

Those with assets within particular bands can be charged a pre-determined fee and receive a corresponding level of service in return. Introducing a service model with associated pricing at the outset means advisers can ensure clients receive an ongoing level of service that justifies the fee.

Many of the ‘lifestyle' products offer more than one share class to provide advisers with choices with their service models. Typically an ‘A' share class represents a bundled charging structure, providing access through fund platforms and life office bond and pension wrappers, whilst ‘B' share class is designed for unbundled charging structures available though a number of unbundled wrap providers.

Although RDR has yet to be finalised, it is clear that professional standards will rise significantly. Many firms are already embracing change and implementing a customer servicing model; irrespective, this may be key to delivering significant benefits to long term profitability of firms and ultimately survival.