Weekend Digest for Financial Planners/Advisers & Paraplanners (16th & 17th Feb)


Passive- only investment propositions are back in the news this week, following the latest FSA Newsletter which is widely (mis)reported in industry press. The fact is, there is nothing new in this ‘Newsletter’ but it is worth a read and you can find it here.

This week, we look at four topics; outsourcing to DFMs (or Not), treatment of pension in bankruptcy and orphaned clients. We rounded up with two opposing views of Smart Beta; one for and the other against.

Don’t forget to join us next Wednesday (20th Feb) at 11:00am for the next hangout.  My guest for this session is  Paul Resnik, Cofounder of Finametrica and we’ll be discussing Risk Profiling – ‘Proper’ Science or Complete Bonkers? Details here.

So here’s the latest installment of Adviser Digest, with a summary of the interesting articles this week. Click on the title to read the full article(opens new window)



Ignore the DFM Outsourcing Spin

This article in Fundweb by Philippa Gee challenges the notion that IFA should consider outsourcing to DFM because that is what the FSA prefers or expects!

While it is pretty clear that our friends in the shinny offices in Canary Wharf are going to be paying more attention to firms’ investment processes, the suggestion that they prefer outsourcing to a DFM (or any other approach for that matter) is simply untrue.

‘ I was then told “The FSA are going to be pulling apart anyone that doesn’t use DFMs for most of their clients as that is the approach they now prefer. DFM represents one option you might or might not consider for your clients, but it is not an issue that is being forced on advisers to adopt. We all need to control risk and have a formulised investment process, but that doesn’t have to mean outsourcing your entire function out of fear and concern’ she wrote


Pension Savings Are NOT Safe From Trustees In Bankruptcy

In this article in NMA, Mike Morrison of AJ Bell reflects on the treatment of pensions in bankruptcy.

While public policy used to be that pension plans do not form part of bankruptcy estate,  a recent landmark case (Raithatha vs Williamson) last year set a precedence which means that provided the bankrupt are over the age they are able to draw their pension (but choose not to) the pension entitlements could be subject to an income payment order.

Given that a trustee in bankruptcy is allowed three years’ recovery of income in excess of that needed by the bankrupt  to meet his and his family’s reasonable domestic needs, pension benefits could  subject to an income payments order to force him to make payments to creditors.


Best Way To Catch ‘Orphan’ Clients

This article by FT columnist David Stevenson examines that subject of orphaned clients! Drawing on my earlier article on the subject, he reflects on how an ad on Central Line by newbie online wealth management firm Nutmeg sitting (standing?) next  to one by old guard fund management group Aberdeen  heralds the battle for orphaned clients.

He asserts that orphaned clients represent the ‘business opportunity of the decade’ and while his money is on a certain firm in Bristol clearing up, the market is wide open for advisory firms.

However, ‘fighting the big guys on margin, especially in a world where total costs of ownership cannot be more than 100 to 150 basis points, just is not going to wash…. Advisers need to ‘stick with what they are good at in terms of value-add and that is the whole ‘personal thing’. This slightly curious category includes interactivity, positive and negative feedback, elements of education, hand holding and above all general attentiveness to investors.’

This view is broadly in line with evidence from a recent research by Platforum, which suggest that consumers want validation and guidance, not just transaction and education.

He concludes with a list of three things investors really want; simple educational tools, but with the ability to talk to someone when necessary, affirmation their own ideas are not crazy and option to separate this knowledge-based process from an actual transaction platform.


Smart Beta: The New Way To Accessing ‘Good’ Diversity

This piece in PensionsWeek by Phil Tindall of TowerWatsonis is the first of two articles  we look at on the concept of Smart Beta.

According to Tindall, smart beta strategies go beyond passive investment with the aim of improving portfolio efficiency, but without the need for alpha.

“We distinguish smart beta from market cap weighting in major liquid markets such as equities and bonds. There is no doubt that a market-cap portfolio is the purest form of passive investment, and when managed via indices give low-cost access and broad-market exposure.”

Smart beta can be based on static or dynamic holdings. Either way, the rationale and characteristics of the strategy should be described and understood up front. This compares with alpha, where investors rely on a fund manager to add value using proprietary and discretionary processes, which are therefore not well defined in advance.

There are essential 3 broad groupings of Smart Beta;

  • Alternative ways to weight securities, particularly in traditional markets. This includes  non-price weighted equity or bond indices and often pick up effects such as value or small cap exposure.
  • Asset classes or strategies aimed at capturing alternative risk premiums or illiquid markets, and hence add diversity to a portfolio. 
  • Long-term thematic ideas, benefiting investors that have sufficient time horizons. For example, emerging wealth and sustainability.

Key consideration when examining smart beta strategies should be low cost, simplicity and simplicity and transparent.  He also suggests that the investor, not the fund manager, owns the strategy.


Is ‘Smart Beta’ Really ‘Smart’?

This article by Jeff Molitor of Vanguard argues that Smart Beta strategies are NOT what they are made out to be; the simple yet superior approach to capture a given market’s return and risks.

“In essence, smart beta machines attempt to filter out ‘good’ from ‘bad’ – overweighting the good and avoiding the bad. They would say conventional market capitalisation-weighted indices suffer from a range of ills. Smart beta asserts that unexploited market inefficiencies exist that are ripe for exploitation.”

He points out that because what is good in one period will often turn bad in the next,  no set of simplistic screens or even sophisticated mathematic factor biases are likely to beat the market over long periods. If they did, market participants would arbitrage away the alpha and it would shortly cease to exist.

He also added that smart beta emphasize desired characteristics (size, to yield, to stocks that have a low historical correlation)which may go in and out of favour on an unpredictable basis. 

In the end, these portfolios represent conscious bets against the conventional, market-cap-weighted portfolio. Most investors using smart beta must either believe they’re smarter than the market or be willing to accept a different risk/return profile than the broad market, based on their own distinctive requirements or biases.

He concludes that smart beta resembles the failed sector rotation fad of decades past. What smart beta is not, is a better answer to broad market beta exposure. Smart beta strategies can often look terrific based on back-tested data but the assumption that that ‘past is prologue’ is highly flawed.



I hope you have enjoyed this and hopefully it’ll make you job a little easier! As paraplanners, that’s what we do! As usual, thought and comments are welcome. Enjoy your weekend!

















Abraham Okusanya
Abraham is the founder of FinalytiQ, a research consultancy for platforms, asset managers, and advisory firms. Recognised as one of the country’s leading experts in retirement income, platforms and investment propositions, Abraham has authored several papers on these subjects and delivered talks to the Personal Finance Society, The FCA and several conferences across the country.

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