By Sian Ulia Davies Cole CFPᵀᴹ MCSI Chartered ALIBF
A CIP is an essential part of a financial planning firm’s centralised research – which allows the firm to provide a streamlined, efficient and consistent investment solution to its clients to support them in achieving their goals.
It cannot, and should not, provide an investment solution to cover all scenarios for an independent firm, but it should provide a starting point for the solutions offered.
Like all centralised research, a CIP should be reviewed independently at least once every year, or whenever there is a significant change in the firm, with its clients or markets.
So how do you start putting a CIP together? We believe there are three main things to think about, so we will explore these a little further.
What is important to your clients and your firm?
All great financial planning firms put clients front and centre, so being led by your conversations about what is important to them is key – although just be aware of the influence that the conversations they have with you and others will have on their views.
There will be some fundamental issues that are important to your firm, which you are likely to want to include in your starting point – issues such as a simple investment solution with a low cost; the view that investing is a long-term strategy to buy and hold; or it could be that the firm has a team of investment analysts, and investment performance is the most key thing to your firm.
These important factors will guide the next two issues that need to be decided upon.
What is the firm’s investment philosophy?
We need to consider the underlying foundation of the investment solution that the firm wants to adopt, and this might be led by trends or by other issues.
We often see that low cost is a really important factor required when building a CIP, which naturally leads to a passive investment approach, but as with any other investment approach, the Financial Planners must feel confident in it and believe in it.
Whether wanting to adopt a passive, active or blended investment strategy, evidence can be put together to support these. However, often it is the experience and knowledge of the firm and its clients that will guide this decision.
We are often seeing a preference for only offering ESG solutions, so that should also be considered here. We see some firms creating a CIP that only has an ESG investment solution, or it will be created in addition to a more standard solution – although the consideration here is the different areas of sustainable investment and how to understand any preferences a client has.
The investment philosophy is an important place to start as this will help to filter the solutions available and further shortlist them with additional criteria.
What type of portfolios do you want?
The main decision here is whether to use advisory or discretionary portfolios.
The use of a discretionary portfolio solution will depend on whether your firm has permissions to offer these, but if not, then using a Discretionary Fund Manager (DFM) is a natural step.
Creating and running advisory portfolios is time consuming and requires a team that is experienced and knowledgeable enough to do so. Although these portfolios will save clients the cost of a DFM, the financial planning firm then has to factor in the time it takes creating and running these into their own costs, which could drive up Ongoing Advice Charges for their clients.
We often see multi-asset funds being used, sometimes for clients with smaller portfolios, as these are often mapped to a risk profile tool outcome and cost effective.
We see discretionary portfolios being more commonly used within CIPs and this option has significantly evolved in recent years, with fees moving from around 1.00% p.a. for DFM plus an ongoing portfolio cost of 1.50%-2.00% with passive options now available coming in around 0.40% all in.
These are different, however, from the traditional DFM portfolios, and fall into the definition of MPS – Model Portfolio Services. These are now widely available with differing investment strategies and on various platforms.
Research, however, is still needed – but this can be done by considering the available portfolios and grouping them into risk-mapped peer groups to analyse them.
This doesn’t always provide a clear winner, and due diligence on the DFM is then required, which usually helps in the decision making. All of these decisions, of course, must be documented and reviewed at least annually.
If you feel like you could do with some support with your centralised research, please drop us a line: hello@plan-works.co.uk.
