How a new breed of investment providers are challenging DIY and discretionary management incumbents

Harriet Green
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More to pick from: Technology is helping providers give clients a hybrid option (Source: Getty)

Robotics and automation are penetrating ever more areas of our lives. And while the investment management industry might be given the “stick in the mud” label fairly frequently, it has certainly not ignored the rise of the machines.

While fund managers are launching funds focused on the theme of robotics and increasing automation, investment houses are using new technology to bring more accurate, efficient and cheaper products and services to investors. Although not strictly robotics, one side of this is what has come to be known as “robo-advice”, essentially online tools that seek to provide low-cost portfolio management services to investors.

But what does this mean for you as an investor? With a variety of different options now available for setting up and running your portfolio, how can you decide which is best for you?

Do it yourself

Of course, the principles of investing remain the same – regardless of technological innovation. Sticking to your goals, holding your investments in a range of asset classes (diversification), reviewing your portfolio regularly and being patient form the backbone of building a portfolio, says Adrian Lowcock, investment director at Architas. “These considerations don’t really change, although the nitty gritty of how each is executed and achieved varies with each new situation,” he says.

Yet for DIY investors using a platform or stockbroker to choose their own investments, whatever guidance they might receive in terms of research reports and platform recommendations, the burden is all on them. “DIY means you don’t have to look much further than in the mirror to know who is responsible for the performance,” says Lowcock.

Cost-wise, DIY investing can be relatively cheap, depending on who you invest with, how much you have invested and what assets you choose to trade. You can make it even cheaper by only investing in tracker funds or exchange-traded funds. The annual cost for an ETF tracking the FTSE 100, for instance, can be as little as 0.15 per cent. “Passive investment can be lower cost and has its place, whether exposure is gained through index funds, ETFs or derivative strategies,” says Mark Henderson, senior partner at investment firm True Potential.

The downside, Lowcock adds, is that you may lack the expertise and discipline needed to correctly allocate assets. DIY investors can unwittingly end up over-exposed to certain stocks, for example, owning multiple funds containing overlapping holdings. Increasing numbers of investment management platforms provide tools for exposing overlap to the private investor, usually for a one-off charge, but other issues – such as your portfolio potentially being at a higher risk level than you may wish – still remain.

The value of assistance

If you’d prefer to be without the hassle of asset allocation, model portfolios can be suitable for an investor looking to take a back seat, and particularly if you’re looking to achieve certain financial goals, like repaying the mortgage, or funding the kids’ school fees.

Offering a level of diversification, with managers periodically reviewing allocations, model portfolios offer a level of expertise without a full discretionary service. Fees are often included in contributions, so you’ll make an up-front deposit followed by fixed, monthly contributions. “Model portfolios can benefit from a set process consistently applied across markets, typically using data that picks up situations that other investors might never find,” says N+1 Singer’s Trevor Griffiths. He explains that his firm, to take an example, runs quant screens that pick out small-cap companies with the strongest characteristics of value, growth, technical momentum and earnings quality.

Using a model portfolio can have its downsides: as Griffiths points out, the worst case scenario is that “a model could systematically select all the worst investments, with nothing being done to stop it.” Lowcock adds that model portfolios still require an investor to pay close attention to the value a manager is adding: “unless there is some further engagement, then you are back to DIY-ing it. Or, if left to its own devices, the fund will slowly deviate from the original model”.

That’s where discretionary management comes in, benefiting from the attention, skills and experiences of the individual and/or firm making the portfolio selections, and tailored closely to the risk appetite of the client. It can be very expensive. The cost of advice can be between 1 per cent and 3 per cent of the portfolio up-front, and between 0.5 per cent and 1 per cent on an annual basis. But this may well be a price worth paying for those who want a more personal service and a bespoke portfolio, especially if they have unusual financial needs.

Remember, though, says Griffiths, that there are “no guarantees” of superior portfolio performance associated with adviser-constructed portfolios.

Tech breakthrough

Recently, however, technology has been providing retail investors with a new alternative: blending bespoke, advisory services with the affordability of DIY investing, and also allowing for a mix of passive and active investment. IG, for example, has just teamed up with asset manager BlackRock to launch IG Smart Portfolios. With BlackRock providing the asset allocations, IG uses its fractional share technology to graduate the investments clients have in an ETF portfolio and eliminate cash drag, basing each portfolio on one of five risk ratings.

“We prefer ‘online wealth manager’ to ‘robo’ – it’s not algorithms whirring away in the background, but an account can be traded with the touch of a button. Rather than it be passive by another name, managers can work to ensure the best risk-adjustment at all times,” says Oliver Smith, portfolio manager at IG. Online technology like this means offering investors “institutional quality portfolios, while bringing down costs by capitalising on economies of scale,” he adds.

To date, “robo-advice” has been used to describe services targeting those who can’t afford normal advice, points out Lowcock. Or, “going digital” has predominantly meant the improvement of back office systems for wealth management teams. But it is no longer just startups looking at online alternatives for investors. And increasingly, technology is blurring the lines between traditional investment strategies and definitions.

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