The key to building strong, long-lasting relationships hinges on the ability to create trust between the two parties. Nowhere is this more evident or crucial than in financial advice.
Trust between clients and advisers is without doubt the most important component in delivering successful financial advice. Olivia Geldenhuys, Investment Director at Schroder Investment Solutions, has highlighted to IFA Magazine why this is also the case between advisers and their solution partners.
Olivia’s role, which sees her act as a conduit between the portfolio managers and the client group at Schroders who deal directly with advisers, allows her to view things from a unique perspective. In a post-Consumer Duty world, Olivia believes that Schroders’ stability, culture and operational efficiency cultivates a sense of trust between themselves and advisers. They know that they are getting a ‘best-in-class’ service in all the relevant areas.
However, whilst Schroders’ prestige brings that initial trust from advisers, ultimately, long-lasting trust comes from evidenced success. Olivia emphasises how Schroders’ alternatives allocation has provided a ‘safety net’ through a difficult 12 months for markets whilst also providing a chance to create alpha through selected ‘return enhancers’.
Finally, Olivia outlines Schroders take on the ‘Active vs Passive’ debate as she makes a case that both have their place in a client’s portfolio. The best results are achieved by knowing when to utilise each approach not by blindly sticking to one or the other.
IFA Magazine: What do advisers really want from their solutions partner in the post-Consumer Duty world?
Olivia Geldenhuys: “I’m not sure that things have really changed much in terms of what advisers look for with clients. However, what I think has really been enhanced through the Consumer Duty process is the line of trust. I don’t want to speak for advisers, but what we’ve seen, if we look at some of the reports analysing what it is that advisers are actually looking for in this environment, is that it all hinges on that trust. Trust is the golden thread that runs through every process that we have. It’s the trust that investors put in their advisers who then put it in us as their investment managers.
“By continuing to earn advisers’ trust, we can provide them with investment services that empower them to do holistic financial planning so that ultimately the financial goals of their clients can be achieved. I think that’s the most critical part of it. What was interesting when we look at a recent Next Wealth report, is that 12 areas were covered in terms of what advisers are looking for in an investment partner and how important financial strength and stability is. Schroders have been around for more than 200 years and some of the current members have been here for 15-plus years so there’s even stability in the workforce.
“Another thing is around culture and values, which need to promote the culture and values that advisers have, as good custodians of clients’ wealth. Therefore, when those cultures and values contribute to ours, this offers something powerful.
“Then last one, which is more on the operational side, is around platform availability. We have availability on 16 platforms for our model portfolios and multi-asset funds. That makes an adviser’s life easier if they know that they can easily access these investment options and they don’t need to then go through the additional change of moving platforms if change is needed within the investment portfolio.”
IFA Magazine: Alternatives are becoming a more and more popular component of asset allocation for model portfolios. What are the benefits of including alternatives in your strategic asset allocation?
Olivia Geldenhuys: “Last year really highlighted the popularity of alternatives. It’s not new, but I think because last year saw positive correlations between equities and bonds, that really highlighted the need for something like alternatives. The core purpose of including alternatives in our portfolio is diversification and the benefits that it can provide.
“As we saw bonds and equities fall in tandem over last year, our alternatives allocation made a positive contribution to portfolio return. For lower-risk clients who struggled because of their higher exposure to fixed income, having that allocation to alternatives really helps provide a buffer. We hold alternatives as part of our strategic asset allocation but retain the ability to be dynamic within that.
“In our balanced portfolio, we currently hold about 14.5% in alternatives and we implement that via a combination of both risk diversifiers and return enhancers. Naturally, there’s a lot of volatility still at play in the marketplace and so having a tilt towards risk diversifiers is what provides a lot of protection to portfolios. That’s where we are at the moment. Things like hedge fund strategies which can profit with the market going up or down, can help investors to have- greater balance in portfolios.
“The return enhancing side of it is also quite an interesting space. Unfortunately, I don’t think the market is quite ready for a tilt more into return enhancers. Overall, having a strategic allocation is useful for diversification, but you also need a very clear and defined mandate for what you want to achieve with alternatives to ensure it is robust and helps manage overall risk across the portfolios.”
IFA Magazine: The active and passive debate shows no signs of abating. Is there a case for both in your clients’ portfolios?
Olivia Geldenhuys: “The active and passive combination is interesting because it merges two philosophies together. Active management says markets are inefficient, there’s room for price discovery, we can source opportunities in the marketplace and generate alpha in certain areas. However, passive instruments run on the philosophy that there isn’t price discovery available, that markets are very efficient, and all the information is available to investors and things are priced the way they’re supposed to. Having a combination of both allows you to implement a bit of both. I think for investors who are not quite sure whether they believe fully that markets are efficient, or believe fully that markets are inefficient, having this combination really bridges that gap.
“When you have an efficient market, for example, like the US, information is available and everyone is paying attention to it. That means that by investing in the large cap US stocks, you can ride the momentum of those returns, both on the upside and downside. We’ve certainly seen that massive concentration of performance play out over this year specifically.
“However, there are parts of the US market which will be inefficient, so it doesn’t actually hold true for absolutely everything. The small cap stocks in the US present a few opportunities where you can generate alpha and you can identify unique companies who are well positioned to benefit from growth. Even in these markets which seem efficient, are pockets of inefficiencies. I think having a combination of active and passive is not simply saying a 50/50 split between each of those options. We use our Global Wave process, a collection of seven metrics which look at the overall health of the economy. This tells us if the world seems like it’s in a slowdown environment, so we allocate more to active managers because they’re able to source those opportunities and generate alpha. But if we are more in an expansionary type phase, we’d allocate more to passives, to benefit from the momentum that the market then has.
“That helps us to understand an overall allocation to active and passive, but then breaking it down further when we think about efficiencies in the marketplace, that’s where I think you can really find those opportunities. It’s where you want to allocate to active managers because what you’re paying for is their ability to position a portfolio to potentially benefit from superior returns relative to an index. Bringing it back to alternatives, that’s an area within the portfolio where we want to be very active. In our offering we run a range of multi-asset portfolios called the Schroder Blended portfolios. They have a combination of active and passive and in the alternatives asset class we allocate 100% to active managers. But then in the US, like I mentioned earlier, we’ll have a combination of active and passive depending on areas within the submarkets.”
In summary, advisers will be looking for an investment partner who not only has the size and strength to deliver for the long term but also whose values and approach aligns with their own.
At Schroders, their ability to pour the expertise from across their global group into helping investors target the opportunities that are most relevant for their needs, in the way that works best for them, underpins their success. This sets them on course to continue to deliver excellence in investment portfolios through relationships based on trust.