Are your portfolio tools impartial?

The industry needs to be wary of the assumptions underlying the risk profiling and asset allocation tools currently being added to financial products says Ian McKenna, director of the Financial Technology Research Centre

As I examined last month, the increased cost to consumers of face to face advice in a post RDR world represents a major opportunity for corporate or workplace platforms to become the standard delivery mechanism for advice to mass market and mass affluent consumers.

It is becoming clear however that there are a number of pitfalls that organisations creating such solutions need to be very wary of. For example, whilst the whole industry appears at this time to be focusing on building complex open architecture corporate platforms, it is important to remember that the number of consumers who want a broad range of options is, in fact, very limited.

An increasing range of planning tools is emerging to assist with such processes, but I am seeing mounting evidence that there is a misalignment of thinking between a number of the organisations building such services, the product providers offering them to advisers and advice firms.

A growing number of large distributor businesses are creating their own managed portfolios to deliver simplified packages of solutions to membersof schemes tailored in ways that can match individual’s attitude to risk to an appropriate range of investments. Rather than present the client with a massive range of funds to choose from they are working with a range of organisations, from fund management groups to specialist research houses, to develop packages of assets to match each attitude to risk that their chosen tools can deliver.

Having taken such an approach it is essential that any risk profiling and asset allocation be able to fully reflect these packaged solutions. When benchmarking organisations’ tools we used to ask if they could adopt advisers’ own specialist portfolios; in the last couple of years however we have learnt it is necessary to ask for clear evidence of how many times an organisation has actually done this and at what cost.

The corporate market can probably learn considerably from what has been earnt by firms operating in the individual market over the last few years. When such offerings first appeared at the beginning of this decade most advisers saw them as nice to have, rather than as a core part of the process. But as their use grew and firms began to put them at the heart of their advice process, concerns began to emerge over the question of who actually controls the recommendations coming out of the systems.

To use such services properly the adviser firm needs to fully understand what the underlying assumptions are behind the tool. Working with several large advice firms, platforms, product providers and tool vendors via Adviser Forum during 2007 and 2008, my organisation developed good practice notes to identify how to achieve such transparency. These can be found at

This issue has become even more relevant of late as the FSA have made it clear that they have concerns over the impartiality of such tools. I believe the regulator is right to have such concerns, indeed in the past my firm has identified situations where the results of certain portfolio analysis has produced recommendations that are too close for comfort to the strengths of organisations promoting the tools. They are also
concerned at the business risks that may arise if an adviser firm becomes dependent on a tool supplied by a pension provider or other financial product manufacturer. Could the advice firm continue to operate in a truly independent way if access to the tool were withdrawn? For this reason tools manufacturers need to make sure that the results created in one tool can be stored in ways which in the future could be used with other services. Right now few, if any, offer this functionality.

The combined effect of the above means that if any pension provider builds tools that cannot fully adopt the chosen asset allocation identified by individual firms, they are likely to see at best limited adoption of such a tool. At the same time, given the FSA’s understandable concern about the risk of abuse that such tools present, it is essential that the tools suppliers and pension providers recognise that interoperability is now the key requirement, as opposed to any unique functionality.

Such transparency will mean that these services can become increasingly functionally rich without presenting a business risk to the adviser firm or their clients. The ability to deliver on these issues will be a major factor in determining which organisations tools are most successful in the next few years.