Robin Powell
By Robin Powell on June 24, 2021

Are individually tailored portfolios a myth?

For a growing financial planning business, switching to a low-cost, evidence-based investment proposition such as Betafolio or one of its competitors is a no-brainer. And I speak from experience.

RockWealth, the planning firm that I work for, was an early adopter, and we haven’t looked back. It’s enabled us to focus on areas where we really can add value — holistic financial planning, for example, cashflow modelling, behavioural coaching and client education. In short, it’s better for us and better for our clients.

More and more firms are now taking this route. The fact that Betafolio attracted assets of more than £400 million in little more than a year of launching tells its own story.

So, what might hold an adviser back from taking the seemingly no-brainer decision to move to Betafolio’s MPS?

Every client is different

One reason, I suggest, is that advisers see outsourced portfolio services as one-size-fits-all solutions. I do know where they’re coming from. Every client is different — each with their own needs and objectives. But that’s not an argument against using a service like Betafolio. For one thing, the notion that advisers genuinely tailor portfolios for each individual client is largely a myth.

There was an interesting study published in 2016 titled Retail Financial Advice: Does One Size Fit All?. The data was provided by four large financial institutions in Canada and included transaction-level records on more than 10,000 advisers and those advisers’ 800,000 clients.

What the researchers found was that clients with vastly different personality traits and risk capacities ended up with remarkably similar portfolios if they shared the same adviser. In other words, the key determinant of what went into a client’s portfolio was what was in the adviser’s own portfolio. In effect, what was sold as a bespoke investment solution was itself one-size-fits-all.

This is, it goes without saying, very concerning — not least because, as a client, you want your portfolio to match your risk capacity rather than your adviser’s.

Misguided beliefs

Of course, clients would have less cause to complain if the advice received leads to outstanding returns. Unfortunately, the opposite is generally true. Three of the four academics responsible for the afore-mentioned study also analysed the investment performance of the same Canadian advisers and their clients. In a paper entitled The Misguided Beliefs of Financial Advisors, first published in 2013 and updated in March this year, they showed how the advisers made precisely the same mistakes with their own money as they did with their clients’ money. Specifically, they traded too often, chased returns, under-diversified and favoured active over cheaper passive funds.

As a result, their personal portfolios performed just as badly as their clients’ portfolios — in fact slightly worse. From 1999 to 2013, the clients underperformed the market by 3.07% and the advisers by 3.66%. And the advisers repeated the same mistakes even when they left the industry.

I’m not aware of any similar studies of UK advisers, but I suspect, if there were one, the findings would not be radically different. My own experience is that the investment solutions clients are offered reflect the views of the adviser. If, for example, the adviser believes in active management, the clients will be put mainly or wholly in active funds; or if the adviser is very cautious (or bullish) about the outlook for equities, that will be reflected in their clients’ asset allocation.

A more rational approach

Surely a more rational approach for an adviser to take is not to allow your own opinions or prejudices to influence portfolio construction at all? Picking funds or sectors, and trying to get in and out of the right ones at the right time, has been shown, again and again, to be a fool’s errand. Diversifying, keeping costs low and focusing on the long term is the best way for everyone to invest.

I’m certainly not saying that everyone’s portfolio should be the same; of course they shouldn’t. First and foremost, each portfolio should reflect the client’s need and ability to take risk. Some clients, too, will be far keener than others to invest sustainably. But, with a modern, evidence-based investment proposition, there’s a portfolio for everyone.

Yes, all clients are different. But all deserve to have their money managed in a rational, time-tested and cost-efficient way.

ROBIN POWELL is Editor of The Evidence-Based Investor.

Published by Robin Powell June 24, 2021
Robin Powell