Working as an outsourced paraplanner means that I get to see and hear about a lot of different tools that financial planning firms are using, thinking of using or building. This is a super interesting part of my job but there is one tool that, in my opinion, can add more complication than necessary – switching analysis tools.
We know that there are a number of rules in place to guide or dictate the advice given around moving an arrangement from one provider to another.
I believe in a less is more approach to considering a transfer from one provider to another. There are several tools available that can assist with helping to make the decision, however, said tools don’t solve the problem, which is in getting information from the current provider and dissecting it – which cannot currently be done by uploading a spreadsheet populated by a provider (#paraplanninggoals).
The fundamentals of analysing a current and proposed arrangement can be done by following these steps:
- Know your existing arrangement.
Request information from the current provider using a Letter of Authority – this will come in handy later if you need to talk to the provider about missing information or when progressing a transfer to chase the transferring provider.
Analyse the information received – looking at things like current asset allocation, portfolio performance over the longer term. We look at performance of the arrangement per calendar year, as we feel that’s easiest for a client to understand, charges and finally, any special benefits that would be lost.
- Know what you are recommending.
Most firms will have what we call Centralised Research – Platform Due Diligence, a CIP and PROD – in place, so the solution will already be determined by this for most clients. If this is not in place, individual research will need to be completed on each case determining why the provider and investment proposition has been selected from the whole of the market for an independent firm.
The easiest way to understand what the new solution looks like is to get an illustration – this will sometimes provide the asset allocation of the recommended portfolio but will at minimum give you the costs and charges associated with the potential solution. It is important to factor in any tiered platform or adviser charging if the illustration does not include this or you are calculating manually.
Not all illustrations include transaction costs for the underlying funds, we find, so it may be necessary to look at factsheets for this.
- Compare the two – charges on a like-for-like basis, performance, asset allocation, benefits.
The easiest way to compare the existing arrangement with the proposed one is on a spreadsheet – I’m a paraplanner; it’s obvious I’m going to say that. This will enable you to compare the costs and charges, and it will look something like this:
You will then clearly be able to see which elements of the arrangement are more or less expensive. We would include the underlying fund costs and transaction costs within the “Portfolio cost”, although we don’t usually reduce this if the transaction costs are showing a negative position.
Once we understand the cost position of the proposed arrangement vs the existing arrangement, we can now consider the performance difference.
To assess performance, we would usually use FE Analytics and build a portfolio with the current holdings. We would then create a graph with the current portfolio and the proposed portfolio showing performance since the start of available data or a suitable term if data is shown for 15 years+. We might add in a benchmark if that is appropriate, but the proposed portfolio should have been assessed, as part of the Centralised Research against any relevant benchmarks, and it can make a graph a bit too busy – especially if we are considering putting it into a client document.
Obviously the clients’ agreed risk level will come into consideration when looking at performance, and where a plan’s portfolio is invested inappropriately for the agreed risk level we will need to further comment that this would not be a like for like comparison and the reasons for its suitability.
Lastly, we will look at discrete calendar performance of the current portfolio and the proposed portfolio over the past five years. We find that looking at performance in these ways allows us to think about it in a compartmentalised way, and we can be more objective about the analysis. If we feel we need to, we might then do some further analysis and create a risk vs reward scatter graph, but we would only usually do this if the performance is close between the current and proposed portfolio.
For me – doing this work manually rather than using a tool involves thinking about why we are doing the comparison and makes us more likely to be objective. We aren’t just “doing it for compliance”.
If you feel like you could do with some support with your switching or existing arrangement analysis, please drop us a line: firstname.lastname@example.org.