he financial advice industry is undergoing a transformative shift and the emphasis is shifting from a traditional, product-centric approach to a
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MULTI-ASSET
Keeping investment simple
Solutions over products - the ‘customer first’ approach
Why investors can’t be passive with multi-asset
It’s humans that are complex
Investing should be simple
Spotlight on: fixed income at Capital Group
Historically, client satisfaction with financial advice has been correlated with market performance. This relationship, while beneficial during extended bull markets, has exposed vulnerabilities in the face of market volatility and regulatory scrutiny. The Consumer Duty, with its emphasis on value for money, has accelerated the industry's need to decouple client satisfaction from market fluctuations.
holistic, goals-based financial planning model.
To thrive in this new paradigm, firms must prioritise client outcomes. A simplified investment process, aligned with clear and measurable goals, is essential.
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approach to a holistic, goals-based financial planning model.
ixed income markets have gone through a painful transition, but the outlook is now a lot more positive. Volatility and risk are far from off the
Opportunities and risks in an improved environment for fixed income
Back to the future: a new era for investing
Why high-yield investors should keep a close eye on the default cycle
Is there opportunity for high yield in today’s new economic era?
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In this exclusive Spotlight, explore the merits of flexible and customer-centric offerings, learn why it pays to keep investment propositions simple, and hear views on why active is the only approach when it comes to multi-asset investing.
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he multi-asset team at Royal London Asset Management are true believers in the value of active management. The team use a multitude of models to inform their investment decisions. One of the most important of these is the Investment
With time horizons used to influence day-to-day investment decisions, Royal London Asset Management's Head of Multi Asset Trevor Greetham explains how being active is the only approach
In the view of Greetham, there is no such thing as passive in multi-asset. He argues that buyers of so-called ‘passive multi-asset’ funds have “already made at least three investment decisions.” These decisions are firstly, to restrict exposure to a limited set of asset classes (usually company shares and bonds), secondly that fixed proportions in these asset classes will always be appropriate and lastly that passive stock and bond exposure is better than stock picking.
There is no such thing as passive multi-asset
The team takes an active approach to the amounts invested in each asset class, adjusting exposures incrementally on the basis of emerging information about the financial and economic forces shaping the world. Different asset classes perform better than others at different stages of the business cycle. Switching between these asset classes depending on the macroeconomic climate is important explains Greetham, who says a passive approach which remains invested in the same combination of assets at all times fails to add value and protect downside sufficiently.
Using the Investment Clock
The Investment Clock represents the different phases of the business cycle, and the Multi Asset team use growth and inflation indicators to ‘tell the time’ on the Clock.
Trevor Greetham, Head of Multi Asset
This differs to how Greetham’s team manages their multi-asset range. They’re active in terms of their universe selection, asset weightings and security selection.
“At a multi-asset level, there is no such thing as passive”
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Bonds are back, although risks persist
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The case for a global fixed income approach
Clock which links asset class rotation to the global business cycle, a tool that Trevor Greetham – Royal London’s Head of Multi Asset – says can help inform where portfolios should be positioned at a given moment.
“We are at a pivotal point of the business cycle, with our Investment Clock right in the crosshairs”
There is much uncertainty around the inflation outlook and multi-asset investors should build in protection.
Importance of active management in times of high inflation
The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
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where we see opportunities for fixed income investors.
ixed income is looking attractive once again, but risks, as well as opportunities, abound. Here’s what’s keeping us up at night – as well as
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Justin Webb, Head of Investment Solutions
Relocating the fixed income opportunity — the case for going global
The investment clock
Growth MOVES ABOVE TREND
Inflation FALLS
Growth MOVES BELOW TREND
Inflation rises
When deciding which assets to include, they take a long-term view with asset classes added to the roster either based on their long-term risk and return characteristics or, sometimes, due to the resilience they bring in a particular scenario.
“Commodities are a good example - they improve the risk-return overall because they are very diversifying,” says Greetham. “And commodities give their best returns in an inflation shock when both stock markets and bond markets are dropping, which is what we saw in 2022.”
And what time is it on the Investment Clock right now? “Sometimes the message is very clear. Right now it isn’t. There is no discernible upswing or downswing in growth and the same can be said about inflation. Our Investment Clock is right in the crosshairs,” says Greetham, pointing out that this situation doesn’t usually last long. Greetham has been overweighting stocks since 2022 but with so much uncertainty, “you can make a reasonable case for a few different outcomes and we expect the picture to become clearer soon, at which point we’re ready to make changes.”
Greetham doesn’t see the inflation surge after Covid as a one off, describing a phenomenon he calls ‘Spikeflation’. Inflation may seem to be low and stable, then suddenly the price level shifts and inflation spikes. He points to an uncertain geopolitical backdrop, a populist attitude to government spending and a reduction in fossil fuel supply as we transition to net zero as reasons behind this.
“The Investment Clock helps us identify when a new inflation surge may be underway,” explains Greetham. “We would most likely respond by dialling up exposure to commodities and reducing bonds.”
Greetham believes you should always keep an open mind about possible future scenarios, but what does he think is most likely to happen? Though Greetham is seeing signs of resilience in global growth, he is wary of how long the US recovery can continue before higher inflation and higher interest rates eventually bring the current expansion to an end.
Current Views
“Bull markets in stocks usually start when the US economy is in recession and unemployment is high, setting the scene for years of disinflationary growth, but the unemployment rate is close to a fifty year low. It’s like a glass ceiling for stocks.”
“We’re not calling time on the bull run just yet, though. Tech earnings are coming in very strong and there’s always a possibility that the next inflationary spike is still years out. We prefer to react to changes as they happen, rather than being heroic with forecasts, of doom or boom.”
Past performance is not a guide to future performance.
Source: RLAM as at 1 January 2024, for illustrative purposes only. Data based on an analysis of business cycles since April 1973.
Solutions over products - the ‘client first’ approach
With the industry evolving in the wake of Consumer Duty, Royal London’s Head of Investment Solutions, Ken Scott, explains the merits of flexible and client-centric offerings
for clients but in a way that delivers value for money.
he introduction of Consumer Duty made things crystal clear for advisers – firms must put clients’ needs first, pure and simple. All parts of advisers’ proposition are under greater scrutiny, to not only create positive outcomes
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The importance of adviser alignment
Ken Scott, Head of Investment Solutions at Royal London, describes how the mutual has been designing its adviser propositions around the client. This, he says, helps the Governed Portfolio and Governed Retired Income Portfolio ranges remain flexible and responsive to clients’ needs.
After designing solutions with clients in mind, adviser needs are the next important consideration. With stretched advisers, and squeezed margins, advice businesses need solutions that align with their processes. This means greater efficiency and allows advisers to spend more time supporting their clients, according to Scott.
Ken Scott, Head of Investment Solutions
“Client needs come first”
Blue bonds - a long-awaited innovation?
“When we think about product design, we are navigating three things: client needs, adviser processes and our own principles and beliefs,” says Scott. “And client needs come first.”
For Royal London, this means starting with the client, understanding their required outcomes and then defining investment objectives aligned to these for their investment solution. To work best, Scott says an investment solution needs to fairly reflect the client. With people’s lives changing – as they grow older, change jobs, approach retirement, step away from work etc – this highlights the need for different solutions at different life stages.
Value is one of the core principles of the Consumer Duty. This has led to every element of the advice supply chain receiving heightened scrutiny, and investment solutions are a key part of this. Scott breaks down value for money into investment, service and price.
With investment choice championed through flexibility, Scott points to how service can be incorporated into investment solution design: “The tools and communications that give advisers and clients access to providers’ solutions and insights are important too. “These tools can also ensure that advisers have efficient access to information so they can maximise the time they spend supporting clients.”
“Evolving existing propositions so existing clients get the same quality of solutions as new clients is a win for everyone”
(1) Wellington Management, Refinitiv. 2.5% represents change in yield-to-redemption on the ICE BofA Global High Yield CCC and lower index between 31 October 2023 and 31 December 2023. (2) Wellington Management, Refinitiv. 8% represents current yield-to-redemption on the ICE BofA Global High Yield index.
Sources.
Green bonds remain the most popular form of use-of-proceeds bond, but investors are increasingly interested in blue bonds, which aim to support projects related to ocean protection and conservation.
onds that finance specific sustainability-focused projects or activities – also known as use-of-proceeds bonds – are on the rise.
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John Butler, Macro Strategist
Blue bonds: long-awaited innovation or yet to make a splash?
Responding to client needs
Understanding that clients are not homogenous is key to product design, says Scott. “This means either offering a range of products, or a single product that offers flexibility,” he says, adding this must also consider a client's level of financial understanding: lots of optionality can confuse rather than add value for clients who don’t need it.
Design needs to include offering choices around underlying investment products, risk tolerances, time horizons and sustainability preferences. Client segmentation is a key part of this, and Scott explains this is more nuanced than simply focusing on pot size.
“If a client has simple needs, then regardless of the size of their pot, they don’t need a product with bells and whistles,” he says. “It’s really important that segmentation models avoid proxies and get to the root cause of what drives the need for different solutions.”
This is particularly evident in catering for clients in accumulation and decumulation. Both are critical periods but have very different needs from an investment perspective.
With accumulation, the focus is on capital maximisation before gravitating towards capital preservation when retirement nears. In decumulation, a client is faced with different risks. Without employment income, their capacity for market losses reduces. Scott warns catering for accumulation and decumulation in investment solution design isn’t as binary as it first appears.
“It’s important to consider how to get from A to B,” he says, highlighting the risk in making step change in investments that can expose clients to market prices at a single point in time. Instead, this transition in a client’s life can be effectively managed through flexible investment solutions. Whether through the use of lifestyling or target date funds, or even through regular reviews, the client's changing needs can be accounted for.
Scott adds: “There’s no single answer, but it’s critical the route from accumulation to decumulation is managed as well as the beginning and end points.”
With similar products available to cater for clients’ needs, it can be important to start with their needs and not product. Here, Scott points to examples like multi-asset funds and model portfolios in the individual pensions market; or choosing between group personal pensions and master trusts in the workplace pensions market. In both cases, Scott argues, the solution gives very similar outcomes, so comparing the underlying solutions is more important than being tied to using one type of solution.
“At Royal London we have two distinct ranges – our Governed Portfolios and Governed Retirement Income Portfolios – to support different client needs,” explains Scott. “One seeks to maximise returns for a given level of risk; the other seeks to maximise sustainable income for a given level of downside risk.”
This year, the industry must also extend Consumer Duty compliance to their “closed book” products which can present fresh challenges. Investment solutions designed to allow existing clients to get the same quality of service as new clients will benefit everyone, according to Scott. This means providers have fewer legacy issues to manage, and both advisers and clients have greater confidence in the solutions they’re using.
“At Royal London, we’re not immune to this and have worked hard within management of our ranges to evolve these for everyone,” adds Scott. “Past examples include adding new asset classes to the Strategic Asset Allocation line-up or implementing ESG-tilts across the entire range, rather than setting up new portfolios for new clients.”
The Governed Portfolios at 15
Nine diversified actively managed multi-asset portfolios with different risk/return profiles to match different clients’ investment objectives:
Source: Royal London; for illustrative purposes only. Weights in pie charts relate to each fund’s strategic asset allocation and these weights will vary according to tactical asset allocation.
ProfitShare
Royal London’s mutual structure brings an added benefit to clients. Anyone holding a plan with Royal London is supporting the company’s capital base. Whereas in a public company this capital is provided by shareholders, who are then remunerated through dividends, this is different with a mutual. Royal London aims to include a share of its profits every year in eligible clients’ plans. Called ProfitShare, this means Royal London is owned by its clients which brings a singular focus to the governance of the organisation. This is how Royal London is able to deliver client-centric propositions.
With investment choice championed through flexibility, Scott points to how service can be incorporated into investment solution design: “The tools and communications that give advisers and clients access to providers’ solutions and insights are important too.
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With advice firms firmly focused on delivering and evidencing good client outcomes, staying ahead of regulatory developments and evaluating the variety of AI technology promising to revolutionise how they operate, Royal London’s Investment Development Director Ilana Miller argues why it pays to keep investment propositions simple
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t’s a year since the Consumer Duty was introduced, setting higher expectations around the standard of care firms give their customers. The shift from process driven advice to outcome orientated planning with an increased attention on value has led
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many firms to review their services with an increasing number of professionals now choosing the title financial ‘planner’ rather than ‘adviser’.
Clients may not necessarily see this work that goes on behind the scenes, but they will certainly reap the benefits when they are able to spend more time with their planner and benefit from a plan tailored to them.
Source: Lipper, Royal London, as at 2 January 2024. Past performance isn’t a guide to future performance. Prices can go down as well as up. Investment returns may fluctuate and aren’t guaranteed, so clients could get back less than the amount paid in.
“A lot of [planners] are asking where do clients most value my time – many of them don’t believe it’s in picking funds or focusing on what’s happening in China today”
Ilana Miller, Investment Development Director
“You can’t have a good investment without a good investor”
“There's no regulatory distinction in the UK, of these terms, but firms using the label ‘planner’ typically focus on the client's holistic needs and goals over their lifetime and according to research are more likely to use cashflow,” says Miller. This – combined with an increasingly challenging macroeconomic environment – means more firms are moving to simplify the role investment plays in their proposition.
Focusing on what’s important
Technology is playing a critical role here and enabling internal processes to be streamlined. With greater efficiency, investment solutions can be cleanly and accurately aligned with clients’ financial plans.
The role of tech and AI
Miller is seeing more firms review how technology can enhance their services, with many now exploring the exciting potential of AI applications. This isn’t just about back-office efficiency but transforming client interactions too.
15 years’ navigating markets and demonstrating resilience
“It's not a coincidence that we are seeing more financial professionals move away from their value being wrapped up in the complexity of the investment solution and instead putting more emphasis on to goal setting, the financial plan and ongoing services such as coaching to help the client act in a way that’s helpful to achieving their goals,” adds Miller. “A growing number are choosing to simplify their centralised investment proposition by outsourcing to model portfolios to spend their time where it has most value and impact. I saw one planner sum it up as they’re managers of people not money.”
Simplified investment isn’t just about outsourcing this element to minimise the burden it places on the firm. Investment can be intimidating to many people and seem overwhelming but with more time, financial planners can provide valuable coaching.
LEARN MORE ABOUT WELLINGTON'S FIXED INCOME CAPABILITIES
efaults have been on the rise since 2022, when higher interest rates from central banks across the world started to feed through into
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higher borrowing costs for companies. But higher interest rates have caused less pain for companies than many investors expected. As a result, default rates are likely to peak much lower than they have in previous central bank tightening cycles. If this is the case, it has implications for portfolio positioning.
Alex King, CFA, Investment Strategy Analyst
According to Ilana Miller, Investment Development Director at Royal London, this reflects the growing move towards life planning and the desire to make clear their value isn’t rooted in the product recommendation and avoid the risk of client satisfaction moving in lockstep with the stock market.
The logic is simple – by outsourcing investment and simplifying this element, an advice firm can free up significant amounts of time and resources to focus on the aspects and services most highly valued by their clients. Ongoing services are being increasingly scrutinised by clients and the regulator and with FCA Data stating nearly 79% of an advice firm’s revenue comes from ongoing fees it’s clear why it’s a priority to ensure high client satisfaction and good outcomes.
“A lot of [planners] are asking where do clients most value my time – and a lot of them don’t believe it’s in picking funds and focusing on what’s happening in China today,” says Miller.
“AI can help answer complex questions quickly, improve client personalisation, respond to needs of vulnerable clients and you can be available 24/7 via chatbots,” says Miller. “There's been conversations about the risk of advisers being replaced by AI, I disagree, the real risk is being replaced by advisers who use AI to their full advantage to free up time to be brilliant with clients.”
Once they understand that investing largely comes down to a few simple rules it can increase financial resilience and greatly benefit the success of the long-term financial plan, as Miller explains: “You can’t have a good investment without a good investor.”
This means recognising that market falls are normal events and to be expected during a long-term holding period. On these occasions, panicking and selling out of the market can cause longer-lasting damage to a financial plan than a market downturn ever could.
“When an investor can panic and cash out at any point, it doesn't matter how good that investment is,” says Miller. “We have to focus on investor behaviour and that requires coaching clients on key principles to help act in their own interests. It’s a hugely important role that advisers and planners play.”
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FTSE All-Share Index
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ARC Sterling Balanced Asset PCIABI
