To read the full article click here (you may need to register for ft.com). I summarise the arguments below.

Target date funds are the basis of the default fund in the government-sponsored NEST auto-enrolled pension scheme, which is an important boost to their credibility. The next step in putting them on the retail investment map will be product launches from private providers. We expect Vanguard, a target date fund market leader in the US, to be amongst the first. This will allow anyone with a personal pension to match their capital and contributions to a specific retirement date or, if they plan to draw down in retirement, to a sequence of dates.

Target date funds make the risks taken by an investor and the expected payoffs specific to age, stage and the manner in which they expect to take pension benefits, whether as an annuity (with or without inflation protection) or drawdown. It can also make risk-taking activity specific to ‘utility’ or the way in which they value different attributes of the payoffs from risk taking. In personal retirement planning, utility or welfare is significantly defined by the adequacy of real purchasing-power outcomes at distant horizons and the consequences for spending of shortfalls in adequacy. Volatility does not explain utility well in pensions saving. Correctly defining utility, and allocating capital to maximise expected utility at the right time, represent important gains relative to the failed ‘balanced management’ paradigm that dominates investment management today.

In the article I examine whether these benefits can be delivered without the time-intensive personal financial planning or segregation of portfolios that we can achieve, working with very wealthy clients.  I believe this is exactly what is enabled by our adoption of the technique or ‘portfolio separation’: the separation of portfolios into a risky segment and a risk-free segment – risk free in terms of the nature of the outcome (real or nominal) and its date (or duration) supports. It will require, as it does for us, very high orders of systematic  decision processes. It is scalable to the mass market and target date funds supply the basic chassis if not the engine.

(Please note this is only open to delegates of the 2010 Clinical Radiology Annual Meeting )

By attending this short seminar attendees will gain a greater understanding of the NHS Pension Schemes, enabling them to;

• Understand the primary differences between the 1995 and 2008 NHS pension schemes
• Determine which one of the two schemes is likely to be most appropriate for them
• Calculate the deemed value of their NHS pension
• ‘Game’ the pension rules in order to maximise the level of pension benefit
• Determine whether they are on course to breach the Lifetime allowance and what it means if they do

For those with privately funded pensions supplementing the NHS Scheme, Joe will go on to;

• Set out why the investment approach should differ between ‘accumulators’ and ‘decumulators’
• Help you to understand which aspects of planning will have the greatest impact on retirement outcomes
• Discuss practical measures that allow you to keep control of costs
• Highlight practices that are to be avoided at all costs

And with the Coalition government setting out its pension objectives in two recent consultations, Joe will also cover the areas that are most likely to impact the seminar attendees, and so covering;

• The impact of likely changes to the pensions annual allowance
• Improved pension flexibility that is likely to come about with the introduction of a ‘Minimum Income Requirement’

Benefits of planning

All of these new clients undertook an Initial Review: a collaborative approach to defining the ways in which they wished to benefit from their wealth, including soft attributes, such as confidence and control, as well as specific measurable results, such as a lifetime spending plan immune to the worst that the economic gods might throw at it.

Good financial planning delivers its own benefits. Some are immediate in the sense of the clarity that comes from giving money different tasks to perform or the confidence that comes from stress testing the household economy. Others emerge gradually, such as the ease of decision making that comes when there is a plan to refer to, or are only apparent if and when stress actually happens. But the real test, whether they are able to look back in later years and decide they did get satisfaction from their wealth and avoided regrets, is one they have to wait for.

In 80% of cases, clients undertaking planning went on to retain us to manage their assets, which suggests the planning delivered some immediate or expected benefits. In several cases the clients who did not go on did not retain another manager and preferred to be self-directed (including financial professionals who valued the planning but had access to good investment solutions).

In no case did we end up managing part of the assets in conjunction with or competition with other managers – possibly because we are flexible about retaining good products or privileged access to products but largely because clients value having a single ‘ringmaster’ when multiple investment solutions are being used.

Why did they talk to No Monkey Business?

Our analysis suggests that only 10% of new investment clients were actually ’selling’, in the sense that they were keen to talk to other firms because they were fed up with their existing advisers.  We find this surprising and it contrasts with the first two years of our existence when many prospects cited problems with banks and IFAs over particular types of product and their assessment of risk.

Of the 90% who we say were ‘buying’ rather than selling, 40% had a specific event-based need, such as stopping work, selling up or needing pension-specific guidance. (The proportion looking for pension advice is down dramatically from the peak around A-Day.) That leaves 50% who were willing to talk to us just because it sounded like we might have a better mousetrap.

What did they leave behind?

Where they came from reflects the focus of our marketing in this period on high-earning professionals, where the well-entrenched advisers include Ruffer, UBS, Towry Law, Andersen Charnley and Saunderson House.

With the exception of Ruffer, which manages money with a bias to a single risk tolerance consistent with its own investment philosophy, the other firms seek to meet varying client risk preferences by matching them to a small range of standardised ‘balanced’ asset allocations. They therefore conform to what we call ‘factory wealth management’ which emphasises economies of scale and production-line processes. These are features common to most asset-gathering business models, whether discretionary or advisory, whether in a bank, an IFA or a pure wealth management firm.

In the factory model, productivity is maximised by channeling the very wide diversity of individual needs and constraints and idiosyncratic risk preferences into a narrow range of standard portfolios. In practice, the asset classes used as building blocks are common to all and the main difference between them is the weighting in fixed-interest bonds – an asset we think is extravagantly wasteful of a limited risk budget.

Nowhere is this manufacturing model more inappropriate than in ‘drawdown’, by which we mean a financial goal which requires a stream of cash flows to be generated and sustained from capital resources. Drawdown goals have quantifiable outcomes as date-stamped amounts, usually in real terms, after inflation. The most common is funding retirement spending (whether consuming pension or non-pension capital). In our market, where defined benefit pensions are not so common, self-funded retirement spending is a key objective.

The second common attribute of their previous managers was an implied belief in the active management bet. I say ‘implied’ because many investment professionals do not believe they can sell anything else even if they realise that active management is a loser’s game, so conditioned is the investing public to playing the game.

What did we do differently?

For planning clients who retained us as manager, our fully-customised Defined Outcome portfolio approach replaced the standard variants of balanced management they were used to. That is a big change.

Apart from altering the approach itself, the effect was never to validate the same level of risk taking and we either increased or reduced the overall level of risk, making it consistent with planning-based preferences. What planning typically revealed was that people were not taking enough risk to achieve the benefits they most valued. We do not find this insight became a source of blame for the previous adviser. A common tendency was for people to have accumulated cash from high earnings due to a lack of investment relationships they had confidence in or to avoid having an asset-based fee attached to that money.

Changes in risk levels were implemented not by altering the mix of standard diversified asset classes but by a ‘new’ mix of risky assets and risk free assets (’dilution’ not ‘diversification’).  Until clients undertook an Initial Review, virtually none was at all familiar with the institutional approach of Liability Driven Investment that ‘matches’ assets to liabilities either by hedging (duration-matched risk free assets) or making risky bets with uncertain outcomes.

When all risk sources were separately identified, the main change in risk budgets was the avoidance of inflation bets, achieved by getting rid of conventional fixed income exposure and replacing risk free assets that do not have inflation indexation with those that do (index linked gilts and National Savings & Investments). 

Where clients have different goals, every asset (including property), held by different owners in different accounts or wrappers, is assigned to a specific goal. Each is managed differently. Other than sibling children, no two clients have the same portfolio. This was a telling difference from clients’ previous experience.

At our clients’ typical wealth levels, substantial non-investment property holdings in the UK or abroad form an important part of the consumption benefits conferred by wealth. However, a common factor is that for lifetime wealth benefits to be maximised, some of this capital will need to come back into the funding of other goals, including retirement spending. We were able to incorporate this into the matching of assets to goal requirements and into the quantification of goal outcomes that otherwise depends on modelling financial asset returns. Clients valued, but had not previously encountered, such a holistic approach to lifetime efficiency of economic capital.

In most cases, after an Initial Review new clients gave up on ‘alternatives’ like hedge funds and private equity, although we often have to nurse holdings until they can be worked out appropriately. In some cases we organised new complementary investments but these used third-party products more often than third-party relationships.

Across the board, we have also substituted active funds by index trackers, using both unit trusts and Exchange Traded Funds (ETFs).

In many cases we changed clients’ thinking about pensions. Sometimes this was just based on the maths: the quantification of present values of cash streams inside and outside pension wrappers. This takes into account not just tax breaks going into pensions but also the high taxation of pension income and the penal taxation of undrawn inherited benefits. Some new clients regret listening to pension salesmen as they realise the tax benefits are not what they thought and they now have to live with the inflexibility of their capital.

How have we altered their costs?

We have introduced total transparency of all costs and defined a cost budget with every new client. We have radically changed the way their costs are allocated. This brings into better balance:

• the amount of charges 
• their importance in terms of explaining outcomes or probability of obtaining value.

‘Implementation’ costs – for obtaining exposure to the market risks and returns sought – are typically cut from about 1.6% to 0.35% for equities and are virtually eliminated for the risk free assets that take over from ‘balanced’ diversification the job of risk control. This saving is mainly achieved by giving up active funds or active security selection as the means of implementing desired market exposure.

These savings free up cost capacity for what really counts:

• dynamic asset allocation 
• continuous risk management
• reporting focused on forward-looking outcome probabilities
• continuous planning in the light of actual goal progress.

In most cases, because of the size of the client’s assets, we managed to reduce total costs by several thousands each year and for the wealthiest, because our fees are much flatter than value-based fees, it is measured in tens of thousands. 

Providing insights into true cost levels and waste has sometimes affected how new clients feel about their previous managers! This suggests the industry is still a long way from being open and transparent but also that customers are not particularly discerning about value until something jogs them.

Service

Generally, clients spoke quite favourably of the service they were receiving from their previous advisers although when it goes wrong it is a killer for the relationship. This was rarely the reason prospects cited. Our competitors are not stupid and employ personable people and expect them to stick close to their clients.

I see no reason to expect us to perform the basic functions better. But we do expect to deliver more of value in the relationship, by making portfolio management a continuous process of financial planning. Defined Outcome portfolios generate a different form of reporting that is much more forward-looking than traditional reports.

I would also like to think, as some of the clients’ comments testify, that we can match any of our competitors when it comes to intelligent obervations about the financial world.

Grange St. Paul’s Hotel, 10 Godliman Street, London, EC4V 5AJ

6.15pm for 6.30 start, 7.30 finish

Format
A small group of interested individuals (often including spouses) around a table, the content substantive and provocative, more education than sales, more conversation than lecture, with further opportunity for discussion and drinks after a prompt finish.

Speakers and subject
In this seminar, Stuart Fowler, who was a leading innovator in the management of institutional investments before founding No Monkey Business, will explain how and why private client advice and portfolio management is not fit for purpose. The consequences of this are most critical for retirees who will be drawing down their own resources to meet their spending in retirement and depending on the products and services the industry can offer.

No Monkey Business financial planning head, Joe Clark, will take you through an approach designed specifically for this purpose, based on the outcomes driven (or liability driven) investment techniques that have already overturned the traditional approach to occupational pension management. Adopting these techniques in private wealth management has been endorsed by academics but also by the professionals that work in private wealth firms.

Stuart and Joe will help you to visualise how different the experience can be when you work with the best techniques, delivered by smart people who are totally on your side.

Benefits of attending this seminar

• Powerful insights into the essential principles of drawing down from capital (whether in a pension account or other forms) when subject to particular constraints, such as competition from other financial goals; maintaining purchasing power; sustaining the rate of draw through bad markets; control and flexibility
• This should encourage you to think about your own needs in a different light and how they could be best met
• An opportunity for you to meet a firm that is successfully challenging the banking, stockbroking, tied agencies and IFA businesses who currently work with professional people.

Who attends
We invite people like our existing clients: high earning professionals that appreciate smart thinking, elegant engineering and who expect a professional approach to charging.

We hope to meet you at one of these seminars or by other arrangement. Places are limited so if you would like to attend please respond promptly by email joseph@nomonkeybusiness.co.uk or click here.

Two well-known academics from Edhec, the French business school renowned for its investment faculty, writing under the heading ‘Private wealth management needs better risk control’, argue that ‘in investment risk management, customisation all too often stops at the client’s overall level of risk aversion, without specific consideration of his or her particular situation’.

The paper published by Edhec-Risk Institute on the application of liability driven investing to private wealth, on which this article is based, was featured in Stuart’s post Academic endorsement for outcomes-driven investment on 4th October.

Stuart was asked by the FT to contribute a piece as a case study because (as far as they know) we are the only firm that has adopted the institutional techniques of liability driven investing when designing and managing fully-customised goal-based portfolios for individuals and  families. The key difference we highlight is the way basing all decisions on probable outcomes changes the nature of the relationship between client and adviser. The FT heads Stuart’s piece ‘The conversation that transfers power’ which is exactly what No Monkey Business thinks needs to happen. For a link to the article please click here.

If you would like to read more about outcomes driven investing, we have also posted this Master Class which uses drawdown from capital in retirement as an example.