Do you understand your client portfolio?

Alex Cook, Chief Executive at GCI Wealth.

Financial planners and wealth managers have always suffered from an inability to evaluate their business book. That’s about to change.

Financial planners and wealth managers typically build up their business books over years. Few clients come without legacy investments and, over time, the book tends to sprawl over many platforms, investment houses and geographies. Few have an accurate idea of what the book’s actual value is, and still fewer can say that each client’s investment portfolio is exactly matched to his or her risk profile – if the risk profile even exists.

The challenge is to obtain a consolidated view of the typical, highly heterogeneous business book in order to understand where clients’ are invested and whether those investments match the client mandate. This is too time-consuming for independents to do manually at regular intervals. As a result, financial planners, their employers and their clients are all exposed to considerable risk.

The financial planners and their employers (if they are associated with a larger entity) risk being found not to be providing sound financial advice to clients. This risk is both regulatory and reputational. Clients, on the other hand, face the risk of not meeting their investment goals: a conservative investment portfolio is a risk for a client who has mandated high growth, whereas a high-growth portfolio is equally risky for a client who is retired.

Earlier this year, we announced the launch of new technology that automated the creation of consolidated reports of client portfolios. We thought, and still do, that it is a potential game-changer. Using that same data, we have now developed a toolset that will enable us to provide financial planners with a consolidated database of their entire business book, and then analyse it deeply to answer some of the questions noted above.

The first step would be to report on how many clients have a risk profile on record. Based on this, it is a fairly easy (though onerous) task to obtain the missing risk profiles.

The second would be to analyse just how many different funds and platforms the client base is invested in. Too many underlying investment vehicles create several risks. At the most practical level, it is hard to keep track of them all, particularly as investment philosophies and market conditions are not constant. Another risk would be that a deceptive appearance of diversification might be created, whereas in fact many of the underlying investments are actually based on similar investment philosophies.

Consolidation into fewer funds is likely to enable the financial planner to obtain better pricing, to the advantage of his or her clients.

A third analysis would be to ascertain whether each client’s investment portfolio is optimally aligned with his or her risk profile. This is certainly the hardest kind of analysis to do, and something that it would not be possible, practically, for an independent financial planner to do for each client.

Such in-depth analysis provides the financial planner with the information needed to understand the risks inherent in the current portfolio and take appropriate mitigation steps. Even more important, he or she is now in a much better position to maximise the growth potential for each client.

Without an in-depth understanding of their business books, financial planners and wealth managers create risk for themselves and their clients. Now they have a solution.