Does size of client’s pot affect investment strategy?

Investment strategy

For intermediaries only 

Our latest Adviser Attitude Report, published in April this year has revealed some significant differences in the investment strategies used for different clients and by different adviser firms, depending on size. The size of pot a client has to invest seems to have a significant effect on the type of investment strategy advisers adopt on their behalf. So too, does the size of adviser firm.

Investment strategy by size of client’s investment pot

Our research pointed to differences in the investment strategy employed on behalf of wealthier clients compared to those with more modest investments. We found that advisers placed 37.5% of assets into multi-asset funds for clients with pots of less than £100,000 while only 18.7% of these client’s assets go into model portfolios. This trend reverses for clients with more than £200,000 with 43.1% of assets going into models, while only 15% go into multi-asset strategies.

It’s clear that multi-asset funds have a prominent role to play for the mass of savers with smaller sums to invest. Over-arching costs are modest, they’re simple to administer and economic for advisers to govern even given small pot sizes. Third party multi-asset funds have the great advantage of having built-in risk management and the external manager shoulders much of the compliance burden. They may be seen as the ‘budget’ option but this ignores the fact that there are a number of very high-quality multi-asset funds now on the market. This enables advisers to recommend them with confidence and allows them to cultivate strong relationships with their younger clients that will hopefully pay off in later years.

As their client’s wealth grows and the amount invested increases, the extra cost of models, not to mention their exclusivity, becomes a much more sensible proposition.  

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Source: Aegon Adviser Attitudes Survey, March 2018. Research conducted by Opinium amongst 252 UK financial advisers. Fieldwork conducted 21–27 June 2017. The model portfolio figures shown include in-house portfolios as well as those using external expertise.

Investment strategy by size of firm

It will perhaps come as less of a surprise to learn that there are wide differences between the sorts of investment strategies offered by large compared with small firms and sole traders. With scale comes the ability to build ‘house’ investment propositions and these are of course used to create economies across a firm’s client base.

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Source: Aegon Adviser Attitudes Survey, March 2018. Research conducted by Opinium amongst 252 UK financial advisers. Fieldwork conducted 21 – 27 June 2017. The model portfolio figures shown include in-house portfolios as well as those using external expertise.

Where firms have less than £5 million in assets under advice (AUA), multi-asset funds account for 41% of AUA and model portfolios for just 19.3%. For firms with AUA in excess of £100 million, multi-asset funds account for only 21.5% of AUA whereas in-house model portfolios account for 47.3%.

Here, larger firms are taking advantage of their size and asset base to defray the costs of building and managing models across a larger asset base, thus limiting unit costs. They have the bandwidth to build deeper investment capabilities to meet the demands of wealthier clients for more tailored solutions.

Models and multi-asset strategies set to dominate in years to come

The trends we are seeing are being driven by client needs, service costs and scale.  These factors are key in determining how the market will develop in future. Clients will always seek the best they can get for their money, this is true of every industry. Good quality, off-the-shelf portfolios provide an excellent (and generally cheaper) option for clients with smaller pots while reducing the administrative burden, and therefore the cost, for advisers.

Model portfolios, by contrast, involve greater risk, require more frequent servicing and demand extensive fund research and portfolio management resource, making them viable only for clients with larger assets generating higher advice fees.  Furthermore, models become more economic for larger advice firms which can manage them at scale across multiple clients through platforms’ bulk switching and model portfolio capability.  Where larger firms have the resources and expertise to build a centralised investment proposition, they are increasingly developing their own portfolios for their clients.

We are seeing a shift away from individual stock or fund picking in favour of multi-asset and models that we feel is set to continue. However, as the cost of multi-asset strategies reduces and they start to prove themselves in terms of risk-adjusted performance, we believe they will gain an even greater share of the market.