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Cover star investing: 'We need to educate clients about passive and active'

Having left a network last year, Essendon Financial Planning now offers clients a wider range of investments

Cover star investing: 'We need to educate clients about passive and active'

Young firm Essendon Financial Planning is broadening its horizons when it comes to investments, as it moved from a restricted proposition to independent status only last October.

Both managing director John Ward and director and financial planner Catherine Morgan see the benefit of working from the whole of the market; they say it gives clients more choice. But there is a heavy time cost for their research, which currently involves bespoke portfolios, so they plan to build model portfolios as well.

Essendon was a restricted member of the Old Mutual Wealth-owned network Intrinsic for two years up to October 2017. ‘During this period, we were encouraged to use Old Mutual Wealth and its wealth management arm Cirilium,’ said Ward. ‘Most of the funds were in Cirilium.’

Essendon had a smooth exit from the network, according to Ward. In fact the notice period was reduced from three months to two.

The firm has recently started using Verbatim’s model portfolios for clients, managed by John Husselbee and Paul Kim of Liontrust Investment Partners. In 2017, the Verbatim fund range became rated by RSMR, which was a major selling point for Ward.

The top holding of Verbatim Portfolio 5 Growth, at 6.6%, is Legal & General All Stocks Gilt Index (see chart below), which tracks the FTSE Actuaries UK Conventional Gilts All Stocks Index. The second largest holding is Fidelity Investment Funds ICVC Index UK, at 5.8%, and the third largest holding (excluding cash) is 5.4% in Legal & General Sterling Corporate Bond Index.

Ward says most of his clients are in active solutions. ‘We need to educate clients about passive and active, because they don’t usually understand the difference,’ he said. ‘You must explain it in terms of what it means to a consumer.’

Ward stressed price alone should not be the deciding factor when choosing between active and passive.

Ethical preferences

Regarding active funds, which make up 70% of Essendon’s portfolios, Ward believes advisers should educate themselves about the fund manager and fund strategy. ‘If, say, you’re doing a review and, halfway through the year, the fund manager leaves, you need to assess the impact on performance,’ he said. ‘Fund changes may have to be made.’

Ward works with clients in decumulation, but many of Morgan’s clients are in accumulation. As such, she looks at lower cost solutions, including Vanguard’s LifeStrategy fund range.

‘Vanguard is helping us build a proposition for those clients,’ she said. ‘Vanguard is low cost but, contrary to what many people think, it’s not purely passive. Indeed, it’s the world’s second largest active fund manager.’

She added many of her clients are at an early stage of accumulation. ‘The difference between, say, a 0.23% ongoing charge and a 0.8% ongoing charge is significant over their long time horizons,’ she said.

Ward puts clients’ ethical preferences at the centre of the financial planning process. ‘I mention sustainable funds to clients because it is all part of discovering what they want,’ he said. ‘The green Liontrust funds, for example, suit some of our clients.’

He wants to work out what a client is comfortable with in terms of both performance and where their money is invested. ‘If they want to avoid North America because of Donald Trump, we’ll find investments elsewhere,’ Ward said.

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