Fiduciary investment responsibility – how to get it right

When times are tough and uncertainty plays heavily on performance, it’s human instinct to want to pin blame on others if investments aren’t shaping up in the way we planned. It means that all decisions need to be clearly backed up by rigorous analysis and easily justified and that places increased emphasis on the fiduciary responsibility of directors and trustees.

Investment decisions that are based on facts and modelled future scenarios, rather than hunch and individual instinct are critical. While all investors will assert that they’ve made decisions based on their own or their clients’ best interests, often the missing link is access to resources and depth to ensure that all pertinent facts are included in – and all emotion and bias removed from – that decision process.  It’s where scale and expertise count, and where picking the right advisor or investment partner is crucial.

The blame game

In the investment space, 2020 was already a year of closely monitoring macroeconomic risks, such as ongoing Brexit negotiations, the US election and the impact of the US-China trade wars, on investment performance – and then COVID-19 emerged. Discussions of investment performance before, during and since the global pandemic and subsequent lockdown have dominated the narrative. Early falls in asset values have been followed by some market recovery, but uncertainty continues.

Underpinning that, has been a current of disquiet from clients that has seen litigation increase, as beneficiaries turn on the alleged ‘reckless strategies’ of investment managers¹. Unprecedented market events are when the true value of advice is tested, because when times are good, it’s easy to hide behind flawed decisions. As Warren Buffet said: “Only when the tide goes out do you discover who’s been swimming naked”.

If you haven’t assessed the quality and resilience of your current investment advice and performed rigorous due diligence on your advisor(s), there’s never been a better time to start. Whether you share the results of that audit with your clients or not, you can demonstrate that they are right to have faith in you and that you take your fiduciary duties seriously. It will provide a bedrock for a deep trusted relationship.

What makes a good advisor and investment manager?

So, what should you be looking for? There are a number of areas to consider that should ensure you’re putting your client and their needs first, including:

• Skill and trust (at both a personal and institutional level, including sector experience)
• Track record and ‘repeatability’ based on robust process and philosophy
• Composure (time in the market over timing of the market)
• Access to (high conviction, well researched) broad open architecture product and services 
• Lack of bias (without strong reasoning)
• High Transparency
• Quantitative and qualitative proof points for recommendations/ performance (what’s the story, does it make sense vs the client, the market, the recommendation, and can it be proven?)
• Forward looking (for example, ESG)
• Stability of the organisation (including governance and control)
• Risk adjusted performance
• No conflicts of interest.

There are also some things to avoid. Common errors we see on a daily basis generally involve using investment managers in isolation as opposed to investment advisors, for example providers with:

• Single or limited strategies that don’t align with your objective (no breadth)
• Limited access/ resource
• Use of the manager’s own product
• Bias without hard justification that aligns to the client’s objective
• Unclear investment process and philosophy or opaque elements within the service or portfolio (assets, fees, valuations)
• Low conviction (generally this provides ‘market’ return i.e. expense without up-side)
• Lack of Offshore expertise that is clearly managed (capital and income splits, situs of assets etc.)
• Key person risk
• Under invested risk management infrastructure
• Unclear use of risk budget and over-exposure to sectors, asset classes, geographies, styles.

The ingredients of investment performance

Of course, there is always a blend of luck and judgement involved in performance, but if you want to boost the potential for success, and be able to show your clients that there’s a solid basis for the trust they place in you, you need to make sure that is underpinned by discipline and infrastructure.

Demonstrating that you’re making decisions based on potential return, but also taking account of service levels, efficiencies and cost savings and, importantly, the stability and security of client funds will ensure that when it’s tested, your fiduciary responsibility will stand up to the toughest scrutiny. We see countless examples of decision processes dominated by personality, cost or client bias. These all have a place, but they should be balanced by a focus on long-term objectives and an agile approach that permits adaptability.

Our own approach to investing – stewardship of capital, high conviction, low total expense – which sees us focus on building a high-quality portfolio that will stand the test of time, has been rewarded through both good times and bad. By way of example it’s an approach we’ve followed since the inception of our Flagship Multi-asset Portfolio in 2006.

The results (medium risk GBP) at +6.62% per annum compared to +4.25% for our benchmark – would suggest we’re doing things right. Indeed, despite the turbulence that’s characterised H1 2020, we have seen returns of +8.16% in the year to 30^th June 2020.

Ensuring a robust investment process

The reality is that there is no silver bullet when it comes to performance but having the fundamentals in place can make a difference. Managing each element at the right time for the right objective also comes close.

That means considering how well your objectives (and those of your client) have been explored and mapped from the outset, how your portfolio has been populated and on what quality of advice that was achieved, as well as the performance, cost and quality of ongoing advice. And here’s the thing, when it comes to advice and investment management, less can be more if the quality is right.

When our investment advisors propose investment solutions, those ideas aren’t just based on their own daily inspiration, but on the disciplined work of a whole team supporting them. That creates a robust and clearly defined investment process and provides access to both international markets and product expertise.

Specialism, teamwork and focus

It begins with our Chief Market Strategist and his team researching the effects of macroeconomic changes on financial markets and translating that into actionable advice and investment themes. Our product specialists then populate those themes for each asset class.

Our Investment Advisors take time to understand your long-term objectives, tailoring their investment proposals using a broad, but high conviction solution set. This helps them to create portfolios that combine the right proportion of long-term discretionary investment, and satellite shorter-term tactical advisory investment ideas to help you achieve your investment objectives in a well-diversified and risk-controlled way.

It's a strategy that has offered investors some much-needed resilience in one of the most difficult times in recent history.

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