Article published by Wealth Briefing on 8th September 2014. Subject to copyright.
Many discretionary fund managers are used to attending beauty parades. Recently Martyn Gowar – of McDermott, Will & Emery, the legal services firm, asked the following question of practitioners: “Beauty parades – don’t you hate them?”. Research seems to show that practitioners in the investment and wealth management industry do too. It may be time to rethink what they’re trying to achieve and make the experience better. The article is by Russell Bussey, of Bussey Consulting. Both of these firms are based in the UK.
RB: What happened before beauty parades became the accepted approach for appointing a new investment advisor?
MG: When we needed to change a manager we would pick up the phone and talk to the client who would, almost as a matter of fact reply, “Well that’s fine….. who are we going to move to?” We would reply with the name of an individual who we’d both worked with in the past and trusted and we felt, importantly, would have a personal chemistry with that client. It is simple, really.
RB: And on what would your selection process depend?
MG: The relationships we had came about through knowledge shared between members of the firm. Additionally I used to speak to a person at the investment firm who was responsible for the allocation, selection buying and selling decisions and delivering what was required of the portfolio. I’m afraid that nobody had heard of “Modern Portfolio Theory” we had trust in the name of the firm and the individual. “My word is my bond” actually meant something.
RB: Were you concerned about giving advice?
MG: No. If a client asked for my opinion, and I felt qualified, through my experience, to give it. In fact I would consider it as part of my role as a “trusted advisor” to be informed and then to share my views. I never felt, unlike some do today, that I was ever at risk of either being sued or losing the client. But giving advice is not (or was not) making decisions. I think that one of the changes in my working life has been that clients were much more independent or autocratic, and expected to be their own person.
RB: When did things begin to change?
MG: I noticed a real change after Big Bang in late 1986. There was a definite increase in the sales activities of the financial institutions. At first, this was the stockbrokers actively marketing their services. !! RB: Did you find that a good thing?
MG: In general [yes]. The City and the whole world was changing at a tremendous rate and it was good to understand what was happening and why. I don’t think anyone seriously thought the changes would be so far reaching and the impact so great.
RB: Would you be surprised to learn that many advisors, especially lawyers, do not see it as their job to advise on investment matters?
MG: No. This is a result of many things. Clients are so much more aware through other advisors, the media, and other clients of the values which matter to them about the service they receive. They are also very aware of their entitlement and what they want for their money. So when a “Professionals Governing Body” can’t agree on what support or education its members ought to know then clear independent help becomes an absolute must for many reasons.
Investment management offerings have also become more diversified and complex so it’s not surprising that advisors are reluctant to put themselves at more risk than they deem absolutely necessary whether the client wants it or not. There’s no doubt that regulation has stilted people’s self-confidence in seeing issues in the round. People have become “specialists” in a particular discipline and, sometimes, the client needs a generalist. I think that everyone should appreciate that they should not give “stock specific advice” but they should certainly feel confident to contribute to a discussion or process of understanding asset allocation or benchmarking decisions.
RB: How do you feel about that?
MG: “I’m sad that something has been lost. If you are a private client practitioner then you should be expected to know what you’re doing. This is where your relationship with the client is laid bare. If you are trusted by the client and you believe you have advice to give, over just being a lawyer, trustee or accountant, then surely your client will value your counsel will expect you to voice your opinions?
RB: Are there any benefits in beauty parades?
MG: I think that, properly thought out, they can only be a good thing. My question is, are they really being as effective for clients as they should be and is the private client practitioner using them to disguise that they do not feel competent enough to give advice that the clients want? The education of that client is also vital.”
RB: But you accept the need to have an objective measurement of the investment manager firm to show that they can provide what clients want?
MG: Absolutely. Perhaps I have been more fortunate as I have had the benefit, in years gone by, of speaking to investment people who did everything. Now everything is constructed by an investment committee. You are banded with others according a risk criteria and the client relationship manager is whoever knocked on your door. They’re then focused on the next client opportunity because they have an annual “net new money” target which their bonus and job depends on.
RB: Is this what you meant when you mentioned that the investment industry bears some blame?
MG: I am sure that the investment industry has become sapped in its imagination by the overbearing power of regulation. I am coming to the view that the old sneer “Those who can, do: those who can’t teach” has been replaced by “Those who can, do: those who can’t, regulate!”