Many of us are already rich and are likely to get richer over the coming years - or at least that is the view of the wealth management industry. This is why every private bank, wealth manager, asset manager, stockbroker and anyone else who markets their investment management expertise is working hard to gain access to our precious assets. Product and service levels are improving, competition is increasing and fees should be negotiable.
So if you are one of these lucky people and are looking for a bespoke portfolio that will not only perfectly match your every investment desire but also take account of your individual risk personality, how do you go about choosing the right manager for you?
Differentiating between 200 or so companies that provide investment services to private investors is not an easy task and, in some cases, information is not very forthcoming. What it does mean is lots of homework - there’s no getting away from the need to look at websites and make plenty of phone calls before meeting prospective managers face to face.
Many companies shy away from stating a minimum asset requirement, not wishing to put off potential clients, but £100,000 is the absolute minimum in most cases. At this figure a sufficiently diversified portfolio can be constructed and investment management fees can be justified. Many of the providers will, of course, want much more before you’re considered client material. At the top of the pile, institutions like JP Morgan Private Bank and Goldman Sachs will be looking for at least £5m.
At the entry level, names to consider are Brewin Dolphin Wealth Management, Charles Stanley, Killik & Co and Rathbones, the last of these particularly if you have an interest in ethical investments. As you would expect, all of the providers make much of their client-focused approach and the tailored nature of their solutions. Traditionally, the business of these types of institution would have been split fairly evenly between advisory services, for clients who want to maintain control over investment decisions, and discretionary services, for those who want a more ‘hands off' approach. However, this is no longer the case: “There’s very little demand for advisory now due to the complexity of the markets and the sheer speed at which markets move,” says Martin Smith, chief executive of Brewin Dolphin Wealth Management.
The service offered at this level tends to follow a consistent format. “Equities and bonds are managed in-house,” explains Mr Smith. “But if clients are looking for overseas investment, then we will use collectives. In addition, if an investor is looking for exposure to hedge funds, private equity or property, then we will again use a fund approach. We have no in-house funds but will look to include the ‘best of breed’ third party funds.”
The inclusion of alternative investments as a potential asset class is a sign that investors are buying into the diversification/low correlation argument even at the mass affluent end of the spectrum. Stephen Vakil, managing director at Citi Quilter, agrees that alternative investments are no longer the preserve of the rich. “The consensus view that returns from traditional asset classes, such as equities and bonds, will not be as high over the next decade as they were in the last, combined with increasing investor sophistication, is the key driver. Our clients will typically have 10-15 per cent in alternative assets, which we will achieve through funds-of-hedge funds and increasingly private equity and real-estate funds,” says Mr Vakil.
Your levels of exposure to alternatives and the strategic asset allocation of your portfolio in total is one of the most important decisions to discuss, as it is likely to be the major determinant of investment performance. As part of this, you need to think about whether you want to have a relative return strategy – where your portfolio is measured against an agreed benchmark – or whether you want an absolute return strategy, which aims to achieve positive returns whatever the market conditions.
Outsourcing
An increasing allocation to third party specialist funds in a portfolio in the search for ‘best of breed’ management is a growing trend. While direct investment in individual equities and bonds remains the norm for segregated portfolios, increasingly there will be some additional exposure to external funds. This so called ‘open architecture’, adopted in a multi-manager, funds-of-funds or manager-of-managers approach, allows institutions to position themselves as providing the most objective advice.
For instance, Cazenove Capital Management offers segregated portfolios for clients with assets of over £1m, but finds many larger clients still prefer a portfolio of funds. Mary-Anne Daly, head of private clients at Cazenove, explains: “If a client wishes to invest in individual stocks and shares, we can do that, but we do have some very large accounts with assets of over £100m which are invested purely in funds.” Cazenove will select external as well as in-house funds for private investors, but will only include the latter if they are performing well and clients wish them to. As Ms Daly says: “You do need to justify the extra layer of fees if you go outside. In the case of equity funds, it is usually worthwhile, but there may not be sufficient added value with fixed income funds.”
The boutique manager Berry Asset Management uses all third party funds, as they see this as facilitating a more contemporary approach. Berry aims to construct portfolios which are less dependent on the vagaries of the stock market and makes significant use of the alternative asset classes, especially funds-of-hedge funds, when markets warrant it. At present, Berry’s lower risk portfolios have less than 40 per cent exposure to the stock market.
At the top of the food chain, GAM also uses a pure fund approach to discretionary management. Charles Smyth-Osbourne, head of private clients (UK), says: “There are two key pillars to GAM’s philosophy. Firstly, providing our clients with access to great investment talent in each asset class. GAM has a large number of internal funds but doesn’t place special emphasis on whether funds are managed in house or externally. The other theme is active asset allocation, as providing access to great fund managers is, by itself, no guarantee of good portfolio performance.”
Investment expertise
But you need to think carefully before investing with a manager who simply invests in funds, particularly third party funds. There are lots of funds-of-funds on the market that you can buy through a fund supermarket or discount broker, so you need to make sure that your private client manager is not over-charging for providing the same product. If you’re not convinced by the funds approach and you are looking for a more bespoke service, there are plenty of providers who offer in-house direct investment in stocks and shares – with names such as Collins Stewart and Thurleigh Investment Management, and many more, among them.
Within some companies, investment ideas are handed down from a senior investment committee while others allow their asset managers to be largely autonomous. But typically, there will be a team of research analysts in the background and, in some cases, the investment house may be a subsidiary of a larger financial institution providing further access to investment research.
An advantage of a manager with greater in-house capability is that you will be dealing with the investor, not an adviser on investments. You will either have a direct relationship with an investment manager or you will communicate with a client relationship manager. Either way, you may feel that this is a more satisfying way to take care of your investments.
JO Hambro Investment Management (JOHIM) offers what it describes as an institutional quality investment process. “As a firm we have an equity focus,” explains Stephen Browne, director of private client business development. “We have a strong stock driven investment process. And all of our portfolio managers are very experienced; every manager has come from an institutional background. We view our process and the longevity of our investment team as key differentiating factors.” JOHIM also manages a small range of in-house funds, including two hedge funds.
Ruffer LLP offers a different approach based on an absolute return philosophy. Investment director Trevor Bradley says: “All the portfolios we manage reflect a balance between ‘greed’ investments - basically equities - and ‘fear’ investments, which are protective investments such as fixed income and commodities. Currently, many portfolios are invested only about 40 per cent in equities with the balance in gold, gilts and other government bonds.” Gold exposure is taken through gold ETFs, gold shares or via the Ruffer Baker Steel Gold Fund.
Whether you select a stockbroker, investment management house or decide to go the wealth manager route will depend on whether you are looking purely for asset management or whether you want a ‘full service’ provider. Wealth managers, particularly the larger ones like Barclays Wealth and Morgan Stanley Wealth Management, will want to look after your finances as a whole and, as they say, ‘bag a bigger share of your wallet’. If your financial affairs are complex and you are looking for a coordinated approach, this could be the best choice. If you have assets of £1m and over, you will also find it much easier to locate advisory services.
Another option for wealthier private clients is a private bank. There are more than 50 private banks operating in London, from small traditional houses like C Hoare & Co, which is still family run, to the goliaths like Credit Suisse and Coutts. High street clearers, such as HSBC and Lloyds TSB, also have their own upmarket banking arms. All of these will offer investment management services.
But remember that nothing at a private bank will be cheap, even if the bank’s minimum asset requirements are acceptable. Of course, if you want excellent personal service where really anything and everything is on the menu, it has always been the best choice and nothing has changed. From high level tax advice and art and antique advisory services to someone acting as your agent to buy property in London or New York and someone to give your children advice on how not to lose the family’s wealth - it’s all readily available.
What has changed, though, is what is offered on the investment side. Once the preserve of rather conservative asset management services, the better private banks have realised that they need to wise up fast and many now provide first rate money management, including a broad array of alternative investments.
Schroders Private Bank is an example. Last year, Schroders acquired NewFinance Capital, a London-based manager of funds-of-hedge funds and manager of the Opus funds, thus broadening its offering with a range of institutional quality funds. Schroders also has a significant track record in private equity and has access to Permira private equity products and those of SVG Advisers.
The financial clout of the larger private banks means they have access to some of the hedge funds which are typically only open to institutional investors. “Size matters in the hedge fund arena,” confirms Fredrik Nerbrand, head of global strategy at HSBC Private Bank. “We have long-standing relationships with many of the successful hedge funds and access to some of the ‘soft closed’ funds. There’s an internal market, if one client sells capacity in a sought after fund, we have another client waiting on the sidelines.”
Face to face
So, having done all the leg work, you are finally ready to meet some potential managers. Given that you are choosing someone to manage your investment portfolio, the investment philosophy and process of the manager should be at the top of your selection criteria. You need a manager who has a well thought out philosophy, robust risk management and a strong conviction in the success of their process. In addition, when you get to the point of signing an agreement with an individual manager, you must be sure that you fully understand the portfolio guidelines you agree to.
Ultimately, though, this is a personal relationship. Your individual contact, be it an investment manger, a client relationship manager or a private banker, needs to be someone who you are comfortable with, that you feel understands your circumstances and hopefully someone who is going to stick around.
More of a minefield is the issue of fees. At a simple level, fees will be either a clean annual management charge, typically one per cent up to £1m with a lesser fee thereafter, or a combination of an annual charge plus trades commission. Some houses may also charge an additional performance-related fee and any investment in funds will obviously introduce a second layer of charges. But potentially there are many more add-ons that need to be checked closely. In all cases, fees may be negotiable, particularly if you are high net worth. In addition, you need to be sure that the advice you are paying for is independent and that there are no fee sharing arrangements between your adviser and third party providers.
Another factor which is difficult to evaluate is one of performance. If you want a bespoke portfolio, then no past performance is going to be directly relevant, but investment managers should be able to show you figures for a number of different model portfolios. It is worth asking whether the figures represent live client money or whether they are just paper portfolios, as the former will be a better reflection of real investment decisions. Also worth a look are the ARC private client indices (www.assetrisk.com) that show average returns for a group of traditional discretionary private client managers. Currently, 22 managers contribute performance data.
Of course, there are a whole host of other differentiating factors; assets under management, office location, number of meetings a year, and whether you can access your valuation online and real time, to name just a few. With so much to consider, ultimately you have to go with what feels right. Be careful not to be too taken in with the soft sell marketing blurb and trust your instinct.
Additional sources of information
Ansbacher Guide to Wealth Management
Asset Risk Consultants Limited (ARC)
Association of Private Client Investment Managers and Stockbrokers (APCIMS)
Investment Management Association
PWC Global Private Banking/Wealth Management Survey
Daily Telegraph Wealth Management Awards - announced in end-October
PAM online and PAM Awards
Take a look at PAMOnline which has information on the majority of asset managers in the UK (we are giving away 50 copies of the PAM directory – see page ii for details). The database allows you to input your requirements – from a segregated portfolio focusing on long-term capital growth to a fund-based approach focusing on income – and search the list of managers which fit the bill.
What to ask a prospective asset manager
What is the typical client profile for your company?
Is there a minimum account size?
What are the range of products & services available?
What does your company view as its area of expertise?
Can I select a discretionary or advisory service?
What is the size of the investment team?
What research do managers have access to?
How would you tailor a portfolio to my objectives & circumstances?
What is the investment philosophy & process?
Would there be an investment benchmark, if so what?
What level of performance could I expect?
What degree of certainty could be attached to that performance?
Can I see a full list of charges?
Is investment advice fully independent?
Would my main contact be an investment manager or client relationship manager?
Can you supply references from existing clients?
