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We live in a competitive world. Anything advisers can do, therefore, to improve their businesses and gain an edge is likely to be of interest. Some have sought to achieve this by moving away from the traditional method of recommending and buying funds from external assets managers, and instead launching their own fund ranges.
There are many benefits for a firm that chooses to go down this route and several ways of doing it. Having its own funds gives an adviser the opportunity to define and retain control over each of the portfolios it offers, so they - in theory at least - are the best fit for their clients. There is also a perception feature - the adviser firm that has its own fund range can claim to offer its clients a level of service over and above just advice.
One adviser firm that has launched its own funds is Adviser Business Solutions (ABS). "For the rationale we need to go back to what we were previously doing," says Jon Foster, director at ABS. "We were using platforms fairly heavily - Selestia, Skandia - as well as the portfolio management tools. We've always tried to actively monitor client investments. But as the client base grew that became extremely difficult." In September 2007, ABS took the decision to remove property from all its clients' portfolios. It took a total of five months. "That really hit us as to where platforms are lacking. While they offer something useful, it ends up complicated. We had five staff out of a total of 40 full-time managing client switches."
The second important consideration for Foster was the lack of availability of certain asset classes via platforms, such as funds of hedge funds, structured products, private equity and exchange-traded funds. "On the positive side, what took us down the third party fund route was the amount of information that we get provided and can pass on to our clients," says Foster. "The way the structure is set up suits the client. The fund has its own website. The control that we have is the bit that is of interest to us."
Another group that has followed this path is Openwork, a network with more than 2,600 advisers across Britain. It has teamed up with alternative investment specialists Octopus Investments to launch an investment management joint venture called Omnis Investments. In July it launched three funds that it defines as multi-asset, multi-structure, multi-manager: IFDS Omnis Cautious, IFDS Omnis Balanced and IFDS Omnis Advanced.
Like Foster, Graham Angell, proposition development director at Openwork, says it is important to go back a couple of stages for the reasons behind the move. "Our basic process for giving advice is the adviser sees a client, finds the most suitable product range in the kitbag, and recommends an investment fund to that client based on their attitude to risk." The range of funds available to network members comprised those that had been approved by the Openwork committee, representing in its view the best funds available from its platform.
"The critical alignment is according to the client's attitude to risk," says Angell.
"Implicit in this is that it will continue to match or the adviser will go back and check." The latter, he says, is difficult as the adviser will not necessarily have the most up-to-date information on, for example, asset allocation from the investment manager. "If we have a bit more control in the investment process, we can treat them more fairly. This idea kicked off the process, which is ultimately where we've ended up with Omnis."
ABS launched the Sentinel fund range using Premier Asset Management as its authorised corporate director (ACD) in May. The range consists of three Oeic funds: the Premier Sentinel Defensive, Enterprise and Universal portfolios, managed by Paul Branigan of Premier Asset Management, Laurence Boyle of Williams de Broë Assetmaster and John Husselbee of North Investment Partners respectively.
"The starting point for us is a fairly rigorous risk profile," says Foster. "We only have three funds, as we wanted to avoid the variations on the same theme you often get with cautious managed, active managed and balanced managed funds. The asset allocation can end up being similar - there's not enough diversity there. We use a blend of the three funds. To have that blending work properly we needed three funds with different characteristics." The Premier Sentinel Defensive portfolio is broadly based on Branigan's Premier Absolute Growth fund, while the Universal fund is run using a multi-asset class approach. Enterprise is a traditional growth portfolio.
Most of ABS clients use the Sentinel funds. The firm followed a pre-launch process for every client where it could access the funds immediately, such as those on platforms. It reassessed risk profiles and then transferred assets into the appropriate blend of Sentinel funds. "We have clients with investments where funds aren't available and so we need to look at physically moving them where possible," says Foster.
This is a process that he says could take up to five years, but eventually the aim is for all clients to invest via the Sentinel range. "Our view is very much, if we thought that this was in any way inferior to the platform model we wouldn't have launched it."
Foster says the approach taken by ABS has been beneficial to the business. "With regard to the amount of resources we will have to put into, for example, fund switching; that will reduce. With 4,500 clients, that will give us an advantage on the cost saving. In discussions with clients, and with other IFA firms, it does give us an advantage. It's a more attractive, more controlled investment approach."
Openwork managed a detailed tender process with 13 firms participating, says Angell. "Octopus won the tender - the critical bit was the ability to access the additional asset classes without compromising risk or cost. The key thing they brought to the party was the ability to invest in both passive and active funds within portfolios. In markets such as the UK and the US, probably about 50% of the holdings are in tracker-type funds. They're getting the alpha from the less efficient asset classes, like emerging markets."
In terms of the structure of the portfolios, the inclusion of a range of asset classes is essential, in Angell's view. "These are the funds of the current generation. Investment management is no different from anything else - things move on and get better. We're investing in the broadest range of asset classes because that's what's available and you can do it without increasing risk. If you are investing and want to maximise returns and reduce risk you really need to be in more asset classes. At the moment this is innovative and market leading."
The Omnis proposition is essentially to invest in the best fund managers in the world, says Angell.
"There is no part of the global fund universe that is not available. There are some funds that are only available to global institutional investors, such as the Nevsky Far East fund, however on top of that not all the best funds are institutional funds." More retail-orientated funds held in the portfolios include First State Asia Pacific and BlackRock UK Absolute Alpha.
Openwork has defined five attitudes to risk categories, and uses a wider recommended fund range that includes the Omnis funds. Those clients with cautious, balanced or adventurous risk profiles are aligned to the three Omnis portfolios. "We don't have Omnis funds for very speculative or very cautious clients," says Angell. "This is something we're looking at and may come to the party. But we can use them for 95% of our customers."
"One of the massive key points," he continues, "is that the underlying funds always match the attitude to risk. We've designed the funds to be completely in line provided clients fit into those risk categories. On top of that we wanted to be able to monitor fund managers. The underlying fund managers can and will change over time where they may be affecting the overall delivery of performance. Whenever changes are made, all clients will benefit. Because Openwork owns 90% of Omnis, ultimately we control the fund managers and we can replace them." Openwork has also defined what it thinks the expected fund returns will be over the long term. The Cautious fund, for example, is designed to deliver 2.5% above cash on a yearly basis. "From that perspective it has helped our advisers talk to clients," Angell adds.
Another benefit is from a regulatory point of view, says Foster. "We were getting to the stage where if we had a predefined portfolio and a client came in June, then another client came in December, they could end up with different portfolios. It's difficult from a TCF [treating customers fairly] point of view to ensure you're offering the same investments and the same level of service."
Foster is also keen to avoid these funds looking like broker funds. "There are three managers; between them they've been doing this for decades. Why would we want to interfere? The third party fund route, done properly, sits between collectives and a full discretionary management service. They get information flow and access to fund managers."
To monitor its portfolio managers, ABS has set up an investment committee consisting of three of the firm's partners plus three other IFAs who use the Sentinel funds. Every quarter each fund manager must detail and justify investment decisions and performance. Any asset allocation decisions, for example, made by fund managers are again uploaded on to the website.
"As the investment committee we also pointed out to one manager that his asset allocation was beginning to tilt towards one of the other funds," says Foster. "We don't get involved in investment management, but we can monitor them at fund level to make sure they are meeting the investment objectives and the risk controls are what we expect them to be. We want control of the process but not the investments."
Twice a year, ABS runs Question Time-type evenings where clients have an opportunity to quiz the three fund managers. "One of the managers said that when you have a client in the front row and you can see the whites of his eyes having lost him money, it really does focus you," says Foster.
The process for monitoring the Omnis funds is highly formalised and rigorous, says Angell. "We've got an investment committee that's pretty much the board of Openwork. We conduct in-depth analysis, measuring expected returns and asset allocation, then get the fund manager along as we need to. We put every one through a model every single month. For a pure distribution business I'd say we're significantly ahead of our peers. We're much more aligned to what a manufacturer would do. We've embedded the investment management philosophy into our investment committee and process."
ABS is just one of many white-label clients using Premier Asset Management as its ACD. Simon Weldon, managing director of sales and marketing at Premier, says that in the past the methodology of choice was broker funds, but these are far removed from what are often referred to by the industry as distributor Oeics. "Theappointment of the investment manager is in the hands of the distributor - the IFA. There is an ignorance in the marketplace over what these are about. The key difference between what used to happen and what happens now is that the adviser has no input on investment decisions on a day-to-day basis. It's a similar role to a pension trustee. For example, Mercers might be responsible for a pension fund and would have a beauty parade to appoint an investment manager to do what the investment objectives say. IFAs work with us as ACD to appoint an investment manager. We might win the mandate, it might be Willams de Broë or any other investment managers that we've got. They do not manage the money. All they can do is work with the ACD and review the performance of the appointed manager."
Premier's clients can set up whatever fund structure they want depending on their investment objectives, but Weldon says typically it will comprise two sub-funds; one a balanced portfolio and one a growth portfolio. The most sophisticated might have five sub-funds, ranging from low risk to high risk.
Weldon says: "If sufficient money goes into them they can really develop and turn into something significant. We do put minimums on the funds and work with advisers to check what they can support the fund with. We're aiming for above £10m over the first year as there are fixed charges to running a fund which need to be covered. We will work with them to agree what the fund will look like, and will structure that fund to meet their requirements. The investment objective is key."
Premier then makes a submission to the Financial Services Authority and, once approved, the two parties can agree on a launch plan.
"If the IFA says 'I want a fund that invests in antiques or pictures', which is not permitted in a normal fund, our responsibility as ACD is to make sure that everything is done according to the rulebook," says Weldon. "It all has to get approved."
The firm also has the flexibility to accommodate, for example, external asset allocation models. "The adviser might say 'I want T Bailey to manage the money but I want a third party asset allocation model in the system'."
Premier's model includes a complete support package for advisers, including a website, factsheets, application forms and prospectus, as well as people on the ground who can work with advisers to get the funds onto platforms such as FundsNetwork. "We are on FundsNetwork and Cofunds," says Weldon. "They treat a distributor fund as another Premier fund." Premier also offers advisers distribution across several other channels. KMG Sicav-SIF set up a platform in July this year to enable clients, including both British and offshore adviser firms, to launch their own fully-supported and administered funds. The platform is structured as a Luxembourg Sicav, to maximise both flexibility of investments and cross-border distribution opportunities. It differs from other models in that new funds are added as sub-funds of the Sicav.
"Luxembourg Sicavs are known globally and respected, with protection for investors," says Kevin Mudd, director of KMG Sicav-SIF.
Mudd says most fund management groups are dissatisfied with the degree of passporting of funds allowed by Ucits regulations, and that Specialised Investment Funds (SIFs) are the way to go. "We have used the SIF regulations, which don't fall under Ucits or Mifid [the Markets in Financial Instruments Directive]. Their scope is much broader and you can market them in any jurisdiction in the world without seeking local permission. Clients want the comfort of regulations and to be protected by proper legislation."
SIFs can also include investments in property, hedge funds and private equity, and can gear up to 300%. "They're very flexible. There's no asset you cannot use. You also have the ability and mechanism to be able to switch and move monies quickly."
British advisers are getting more switched on to using offshore domiciles, in Mudd's view, but they still have some way to go. "Less than 10% of UK money goes outside the UK. Those that are looking may end up setting up in an external to UK jurisdiction. There's a growing awareness that there's more available than what's on your back doorstep. They can look further afield."
KMG's platform, which took 10 months in total to put together, also takes away the regulatory burden from its clients. "The entire regulatory burden falls upon KMG," says Mudd. "It makes it much easier for the IFA. The industry has gone to an outsourcing model. They need ideas to bring to clients, and need to be in control of costs. This adds value to their business." He also points out that owning the funds makes them a real asset. "On the commercial side, there is value in having assets. The funds have got a separate value, so you can borrow against it, for example."
Another advantage of using a platform such as KMG's is that, once the client gives the go-ahead, its funds can be up-and-running in as little as two to three weeks. Cost, too, is a main consideration. Mudd says it can offer adviser firms a fully-launched service at about 20% of the amount it would cost to do it themselves. "In terms of client servicing, you should also have a vastly-reduced administrative overhead," he adds.
With regards to naming funds, regulations dictate that if an adviser firm wants to use its own name then it must also include the name of the ACD. Most of Premier's clients, however, have chosen a separate brand name; Buckles launched the Snowdonia fund, Fry Group the Dynamic fund, and ABS, as already mentioned, the Sentinel fund.
"Most advisers see this as a tool for acquisition, consolidation and investment for their business," says Weldon. "If they have an independent name another IFA can use the fund." He points out that the principle of an Oeic is that anyone can use it, particularly if it is available on a platform. An example, says Weldon, is IF Alliance's Liberation fund. "They are using Liberation to get other IFAs involved with the IF Alliance."
While the Omnis funds are on its network members' platforms, Openwork has not been aggressive to date in trying to get them on other providers' platforms, says Angell. "It's one of the many compelling reasons for distributors to join our network. The way they stick to attitude to risk. You don't have to worry that the fund is not doing what you said at the outset."
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