Freeing up your time to focus on clients

Financial planning versus managing assets.

By DEBRA SLABBER, CFA®, Portfolio Specialist, Morningstar Investment Management South Africa

According to financial services industry research company Investment Trends, the average adviser spends more than seven hours producing a financial plan and suitability report. This doesn’t take into account the time needed for responsibilities such as setting an appropriate asset allocation, building a portfolio and providing ongoing risk management. The reality is that it takes time to build portfolios to meet the different goals, financial circumstances and risk tolerances of every client in your practice.

Increasingly, advisers are deciding to work with providers of discretionary investment management to reduce the time spent on investment decisions and portfolio construction. This enables them to spend more time focusing on other aspects of their client’s financial plan and deliver more personalised services.

At Morningstar Investment Management, we believe that a first-class investment process focuses on the end-investor, strives to minimise cost, and provides long-term solutions that draw on tangible expertise. With this in mind, let’s unpack Morningstar Investment Management’s core capabilities and, more importantly, how we work with the adviser to ultimately achieve a good investor outcome.

We apply our expertise in asset allocation, manager selection and portfolio construction to create investment strategies for our clients. This is strengthened by our access to independent investment research, data and analytics of the global Morningstar group.

Let’s unpack each of these capabilities separately.

Asset allocation

Financial markets are increasingly complex, and the range of investment opportunities continues to grow. We know it’s a massive challenge to evaluate all these opportunities and assess their suitability for your clients. When returns from asset classes are lower and volatility is higher, the responsibilities of managing and monitoring client portfolios become even more taxing.

In 2020, markets played havoc with endinvestors’ emotions. As an independent investment management firm, we manage asset allocation decisions on behalf of our clients and strive to keep clients calm and invested through volatile periods.

During the past year, we increased our South African government bonds position when yields blew out, we increased our South African equity exposure when equity markets tumbled, we took advantage of a stronger rand to increase our global exposure, and we reduced cash as rates decreased dramatically. These asset allocation decisions had a positive impact on client portfolios.

Valuation-driven investing requires experience, dedication and the application of a robust and repeatable asset allocation process. Our approach allows us to maximise our exposure to our best investment ideas and accounts for the complexity and multifaceted nature of investment risk. We look at each investible asset class through a valuation lens, but also spend a lot of time trying to understand the underlying fundamental risk.

Manager selection

Once we establish our asset class convictions, we search for managers that best align with our asset class views. Our manager selection process follows a rigorous qualitative and quantitative method to identify the best of breed managers we choose to work with.

Morningstar meets with fund managers continually and has an ongoing structured review program to ensure we remain informed and can question managers where needed. Funds that appear to have strayed from their investment styles, experienced management and/or organisational changes, trigger a review of our initial analysis.

We are proud that the managers in our portfolios have delivered exceptional returns for our clients. Some of the stand-out performers over the past year have been managers like Fairtree Equity, Nedgroup Core Bond and Ninety One Global Franchise.

We aim to provide our clients with a consistently good outcome throughout their investment journey. We achieve this by blending different managers and styles while still being valuation cognisant. This means that the underlying managers in our portfolios have different roles and therefore different alpha cycles (meaning they won’t all perform the same at the same time).

Portfolio construction

Closing the loop on the first two aspects – portfolio construction is just as important as asset allocation and manager selection.

Maintaining portfolios is a task you can never truly finish: clients’ circumstances change, as do market conditions, asset managers’ performance and other factors that can affect whether a decision is suitable. Every portfolio carries never-ending monitoring and reporting responsibilities.

Portfolios are actively managed and subjected to rigorous qualitative and quantitative analysis when selecting underlying funds. The portfolios provide advisers with many benefits in terms of flexibility, liquidity and transparency. We combine risk profiling, renowned assetallocation research, strict investment selection and professional investment expertise in our Morningstar Managed Portfolios. We use unbiased, objective research from Morningstar, Inc. to create a range of portfolio options for clearly defined risk profiles.

Some of the stand-out performers over the past year have been managers like Fairtree Equity, Nedgroup Core Bond and Ninety One Global Franchise

We constantly review and seek to maximise the reward for risk across the investors’ journey. To do this, we have a formal structure to regularly reassess our asset class convictions, our manager buy-list and the underlying portfolio compilation given the changes in investment ideas, aggregate risks and exposure. This iterative process reconsiders the opportunity set, with a constant eye on fundamental diversification, while remaining biased toward inaction and long-term holdings. A key element is, therefore, keeping turnover and transaction costs as low as possible.

Independent investment research, data and investor education

It’s not enough for financial advisors to be investment experts; they need to understand people. By helping investors uncover their true financial goals and align them to a portfolio, you’re putting them on track to achieve whatever they define as financial success. That’s when they start to understand the value of advice.

We keenly share our knowledge, whitepapers, research insights and adviser tools with the advisers we work with to enable investor success. We provide advisers with the information, materials and support they need to build client relationships and expand their business. We provide direct communications about the markets and portfolio changes and the reasons behind them, so advisers are always informed and able to explain these to their clients.

The information you get from us is immediately relevant to your clients because it can be easily communicated and understood. Our independent investment analysts have a track record of curating, contextualising and conveying investing insights simply and clearly through their candid analysis and use of consistent methodologies. We also have a dedicated behavioural science research team that regularly curate research and tools to help investors reach their goals.

Morningstar is focused on helping you empower investor success

As a financial adviser, you know the real value of your service is making sure your clients’ financial affairs are in order. You make sure that clients are increasing their savings rather than accruing debts. You help your clients save enough to live well in retirement. You create protection policies that can support children in case the worst should happen.

Where once investors and advisers didn’t have enough investment news and information, today there’s too much. Now you need a filter to identify appropriate investments from the rest – those investments that best fit into your strategies and get you closer to meeting your personal finance goals. Advisers aren’t expected to shoulder this investment management burden alone.

Working with a discretionary investment manager allows you, the adviser, to overcome capacity constraints and development expenses. This enables you to concentrate on growing your business, knowing you can lean on your investment management provider. It can also help you to create a better distinction between financial planning and managing assets.

Morningstar is focused on helping you empower investor success. At times like this, more than ever, we strive to provide the support advisers need to help keep clients engaged, informed and on track to achieving their financial goals.