The JP Morgan warning about portfolio planning tools leaving clients in gilts at exactly the wrong time is a timely one.
Whatever the theory behind these tools, the practical experience during the crisis has left a lot to be desired. As a solution to stopping those pesky fund pickin’ IFAs from pickin’ last week’s best seller these tools still have a hugely important role.
But clearly a debate needs to be had first about how much of a tactical or as some say a common sense overlay they need.
There also needs to be debate about exactly how these tools fit with an advisory business where clients under the RDR may be paying for an annual review but where markets, or actually in this case, economics and events turn against them.
Some might say this is a good time to start trying to move most advisory clients to a discretionary basis – for others with smaller portfolios why not just put it with Chatfeild-Roberts? After all everyone rates him, his employers not the least given this week’s news.
Some have defended the tools saying it is how you use them that counts. That is true almost of all things and yet, I think there is a need for a proper industry wide debate about how you use them and that should include the providers and designers of the tools too.
Advisers need to think about what the tools cannot do. I can think of at least two very big picture things for now. They cannot guard you against spectacular economic changes and they cannot tame markets so that they always provide investors with the right sort of risk adjusted returns. They can only help.
But perhaps, we should leave the big picture stuff for later. Right now advisers should be checking out whether they have clients heading for another bath. Personally I wouldn’t test their patience. Unlike several things that have happened recently, this potential little setback is eminently predictable.
I dislike these tools and models intensely. They pander to the human need to feel in control. They give the illusion that advisers are not only in control but can somehow influence the future. They also get in the way of thinking. The Adviser needs to know his client and to then construct a portfolio that is reasonable and stop looking for perfection. The next task is to get the message across that we are in the long run business. short term shocks should by and large be ignored with the focus on 15 to 20 years or more. anything less than 5 years is pure speculation. Next we must resist the urge to meddle ( rebalance) which is often no more than another short term hang up. A spread of actively managed multi-asset funds ( cash, fixed interest, property, equity) left alone for long enough stands as good a chance as anything else and need not cost the earth.