What skills and information do advisers need for effective portfolio construction?
GR: What has evolved in the last three to five years is quite a material change in a number of environmental aspects which have ramped up the need for better skills in portfolio construction generally. Product proliferation has created more issues about how to build and blend portfolios and so on. Advisers are increasingly also challenged to identify their value add, and with FSR coming on top of that, the skills, information and knowledge compared with two or three years ago is substantially greater. In my view, research houses haven’t kept up with helping dealer groups and researchers down that path, and there is a greater expressed and unknown demand for portfolio construction information. Only now there has been the recognition by service providers that they need to help with portfolio construction needs as well as research needs.
DM: If advisers are actually picking direct shares, I think they need to understand companies. If they’re picking managers and they’re making asset allocation decisions, I think they have to have a broad understanding of financial markets and different styles and strategies and how they perform in different market environments. I think it’s a combination of experience over time, but also education over time — whether that’s formally or self education.
RM: I guess advisers need to be trained in investment markets, so they have to have the resources and the skills to do that on the asset allocation side. On the manager selection side — same thing. Do advisers really have the time or even the access to decision makers within fund managers? There is a lot more that goes into the process. An average research team in a research house or a consultancy is around five or six people just doing research.
CB: Advisers need to have access to specialist advice about the potential range of returns and possible volatility that may occur for different products and asset sectors over different time frames. However, even with such advice it is always going to be difficult for advisers because investment is a dynamic, not static activity. In other words, the best portfolio construction for any given client is not going to be the same at all times and therefore ideally requires constant monitoring.
SI: Advisers can use in-house skills if they have research and staff who can crunch the numbers but to do the macro and micro analysis is hard and expensive to buy, and requires three people in a medium-sized group to do that process well.
