At First Wealth, we never stop looking for ways to improve. How can we enhance our service to clients? How do we encourage them to stay focussed on their Life Goals? How can we offer smarter and more suitable products, and more cost-effective options which will deliver better investment returns?
We spend a lot of time asking ourselves these questions (sometimes driving ourselves nuts in the process, sorry team!). Striving for the answers is what pushes us forward every day. Moving forward, not standing still, is key. We as people, and we as a profession, are continually learning; building on our knowledge through shared experience and collaborative thought. This means that over time the body of beliefs we hold about financial advice will change as the thinking, backed up by the data and analysis, moves on.
As a business that puts clients first, it’s our duty to position ourselves at the cutting edge of current thinking. A few years ago, the story around financial advice began to change as the case for evidence-based investing strengthened.
“When the facts change, I change my mind...”
– John Maynard Keynes
As the benefits of evidence-based investing continued to become clearer and we did more and more research ourselves, it became obvious that we had a decision to make. Do we adopt the ostrich mentality and continue as we are, hoping the whole thing will go away, or do we embrace this new approach? As easy as it would have been to just carry on regardless with what we had always done, the facts of evidence-based investing were compelling and undeniable. As a business that’s always looking to better itself and the service it provides, there was only one conclusion: it was our duty to adopt evidence-based investing and harness its advantages for investors.
From Idea to Implementation
This wasn’t a decision we made overnight. It was the considered conclusion of a process that began over a year ago and the result of a lot of conversations with the right people and careful calculations over how we would make it all work in practice.
We partnered with Tim Hale at Albion Strategic Consulting who provided the analytical input to underpin our strategic planning. Their research and data informed our decisions and they helped us work through and understand the implications of our choices in terms of what they would mean for our clients and our business.
First Wealth Technical Analyst, Dan Evans, was our man on the ground. He played an integral role in building the analytics, demonstrating the cost savings and developing the thinking behind our new direction. He drove much of the background research into the evidence-based portfolios, working closely with Albion on how they would be structured, addressing the trade-offs and key factors involved in creating the right offering, and all in the most cost-effective fashion. Dan was effectively the bridge between Albion and First Wealth and will be part of our investment committee going forward.
Most clients will benefit from two costs savings – one from the reduction in fees paid to fund managers, and two, a reduced platform fee.
We also used the services of our main custodian provider, who enabled us to build these portfolios on their platform, harnessing their discretionary powers so that the First Wealth Evidence-Based portfolios could be automatically rebalanced every six months. They have also been incredibly helpful by lowering their platform fees and introducing family linking, so that members of the same family can benefit from reduced fees across the board. Most clients will therefore benefit from two costs savings – one from the reduction in the fees paid to the underlying fund managers, and two, a reduced fee on our main platform, Fusion.
A detailed analysis of all applicable fees and the potential costs savings will be provided to each client ahead of any decision to switch to the new evidence-based portfolios.
A Timely Solution for a Cost-Conscious Era
Evidence-based investing is growing steadily in popularity but there is still some way to go before it’s embraced by the mainstream. In the UK, we are part of what is still a relatively small percentage of financial planning firms who are actually using it, but we expect this to change in the near future as support and understanding increases.
MifiD II shines a high-wattage flashlight on transaction costs that previously went unreported, so investors can see exactly who, what and why they are paying.
One of the drivers behind its increased adoption will be the recent introduction of the MifiD II legislation. The EU’s Markets in Financial Instruments Directive II, to give it its full name, has dramatically increased transparency on fees. It has shone a high-wattage flashlight on some of the transaction costs that previously went unreported, so investors can see more clearly exactly who, what and why they are paying. For the investors who believe they’re paying too much for what they’re receiving, an evidence-based portfolio provides a ready-made, cost-effective solution to their problem. Being able to provide this alternative option to our clients was a deciding factor in developing our own evidence-based portfolios.
The Strength in Simplicity
Ironically, the simplicity of the evidence-based approach could slow down its reception by the wider financial advice profession. When it comes to investing, complexity sells, because human beings often feel that getting something worth having should be difficult. This translates into a tendency by advisers to overcomplicate (and therefore overcharge) where it’s really not necessary.
Warren Buffett made this point brilliantly in his 2016 letter to Berkshire Hathaway shareholders:
‘In many aspects of life, indeed, wealth does command top-grade products or services. For that reason, the financial “elites” – wealthy individuals, pension funds, college endowments and the like – have great trouble meekly signing up for a financial product or service that is available as well to people investing only a few thousand dollars. This reluctance of the rich normally prevails even though the product at issue is – on an expectancy basis – clearly the best choice.’
This is not the way we work. I began by saying how we are driven by the desire to constantly improve what we offer our clients. By providing a simple, cost-effective and rewarding offering tailored to achieving their long-term financial goals, our evidence-based portfolios are doing just that. For more information, download our guide here.
We are in the process of speaking to all our clients about our new approach over the course of the next six months as part of our annual forward planning meetings. If you would like to discuss your individual circumstances sooner, please get in touch, we’d love to talk.