The future of portfolio management

Hello again. So, in my last column I hinted that this time round I'd be taking a look at what the future of portfolio management on platforms might have in store. Consider this a sequel then. Or the difficult second album. They're always just as good, right?

What we see is that lots of firms have different people within the same firms running elements of the house model portfolio framework. This can create a series of unfortunate events with permission and rebalancing issues causing a long trail of version control dead.

Awkward. Anyway, in my last column for the fine people at Capita, I took a swift look at the main methods of Centralised Investment Proposition (CIP1) construction on platforms and I shared my views on some of the pros and cons of each method. Now, I'm going to turn that on its head and take a punt at what the future might have in store and how some things may change.

Predictions are a tricky business to get right (although, I've long since stopped betting on Scotland to qualify for anything) but the truth is that if you ground them in enough common sense and stretch out the timeframe long enough then no-one can possibly hold you to account. Bonus! That's a top class consultancy technique that you can have for free.

I jest of course. Let's cut to the chase and have a look at three things which I think the future might have in store.

Building a wall between financial planning and investment management

No, not that kind of wall. We're not trying to make platforms great again, they're alright as they are. It's a metaphor, innit.

What we see is that lots of firms have different people within the same firms running elements of the house model portfolio framework. This can create a series of unfortunate events with permission and rebalancing issues causing a long trail of version control dead. Frankly, if you were to build the UK financial services sector from the ground up, this situation would simply not exist.

In short, I reckon running advisory models and investment management functions under the same roof at any kind of scale doesn't feel sustainable to me. Doing it properly will require either discretionary permissions, outsourcing or a watertight series of processes and controls.

Ultimately, I'm betting that the market might polarise to the point that advisory models in the truest sense are generally found only in small specialist operations or in firms where functions are separated. We're already seeing tonnes of adjacent evidence in the market where many financial planners, particularly in the next generation, are favouring behavioural financial planning over tinkering with investment products.

I reckon running advisory models and investment management functions under the same roof at any kind of scale doesn't feel sustainable to me. Doing it properly will require either discretionary permissions, outsourcing or a watertight series of processes and controls.

Tech will make things better

Well, of course tech will get better because that's what tech does. Slow down Nostradamus!

In the longer term, Blockchain and distributed ledger technology has the potential to be a huge disruptor in financial services making lots of processes much easier (AML, onboarding, suitability et al), reducing the admin burden, building and storing client profiles which in turn will drive better client segmentation.

In the shorter term, we're going to see some very clever algorithms from some very, very clever people delivering tweaks and enhancements to current processes and practises. While we understand the drive towards industrialised, commoditised CIPs, current practise leaves little wiggle room for individualisation.

I reckon in the short to medium future we'll see more developments around tailoring for individual needs. Think stuff around tax-optimisation and individualisation (e.g. ethical overlays) of otherwise off-the-shelf portfolios. Some of this kit is hitting the shelves now. It'll soon be the standard.

A problem for the ages

I'll win no awards for pointing out the potential implications and concerns of an ageing market for individual advice. Why I'm doubling down on this concern is how this squares up with the current accepted wisdom around safe withdrawal rate theory + drawdown + cash management being the vehicle of choice for retirement portfolio management.

While I can get on board with much, if indeed all, of this thinking, I have two recurring worries: (1) What happens to the small minority of customers for whom the safe withdrawal rate pans out as being less than safe and (2) how is the sector going to (efficiently) service an ageing population who, in the nicest and politest sense, may not wish to be serviced in their twilight years.

What could tip the balance? Annuities will continue to play a role and we may see another generation of sophisticated guaranteed income products (including products that offer flexibility with some element of guarantee). Data and technology will drive the market here. Guarantees may become more affordable as the industry harnesses the power of big data to design better products.

More obviously, technology will enable income sustainability kit. Algorithms that can analyse investment performance in the context of risk and objectives will enable portfolios to be managed, work seamlessly with the cash management aspect of platform tech, be rebalanced and more easily reviewed. This paradigm doesn't exist yet, but it will.

Dystopia/utopia?

So, there we have it. Three things that may or may not happen at an arbitrary point in the future. But let's close our eyes, say a collective prayer to our deity of choice and imagine a post-Brexit utopia where it matters little whether that nerdy guy from that Scottish consultancy with the weird name was right or not. You'll be too content to care.

Visit www.langcatfinancial.co.uk for more from Steve and the rest of the lang cats.

  1. We know from our various items of research that CIPs are the centre of gravity for platform business which is why we talk about it so much. 86% of respondents to our November 2018 State of the Adviser Nation study (235 respondents) state that they run a CIP