The criticism that more and more wealth managers are moving towards restrictive buy lists, resulting in greater homogenisation, may have been a little too premature.
Exclusive research by Citywire has revealed that of the 134 registered readers of Wealth Manager surveyed, only 36% said that investment managers at their company are tied to a buy list.
In addition, 24 respondents said that their firm does not have a buy list of recommended funds and does not plan on having one in the future. Only eight are planning to create a buy list in the future.
Even among firms that have buy lists, there is significant variety around both what and how many investments are featured. In Wealth Manager’s 2017 Top 100, as an example, we saw that the average buy list stood at 270 funds. However, while a banking giant like Deutsche Bank Wealth Management has close to 1,200 funds on its list, a boutique like Tcam Asset Management only had 20.
To have or not to have?
Following our research, we asked two wealth firms for their take on the value of having buy lists. For Redmayne Bentley head of investment management James Andrews, it is important that investment managers have control over decisions and are therefore not tied to a buy list.
The firm instead has a recommended list, however investment managers are not restricted by it. ‘If an investment manager wants to buy something, they can do their own due diligence and buy it for their clients,’ he said.
In order to make sure the company still meets its regulatory requirements and suitability for clients, it operates its own proprietary risk tool which scores every individual investment. Therefore, every portfolio has a risk level based on the sum of its parts and that has to be kept within a certain band, depending on the client.
‘While they have quite a free rein, the portfolio has to have the appropriate risk and meet suitability requirements. I used to be an investment manager and I would not want to sit across from a client and defend a purchase, for the answer to be because it was on the buy list.
‘We sell expertise, but what the client buys is trust. They are handing over their money to someone with the expertise. If you haven’t made that decision yourself, it’s really hard to build that trust with the client. I want them to have ownership of that decision.’
He argues that the direction of travel in the industry is towards buy lists and model portfolios. While admitting that for scalability, and due to regulatory pressure, some companies will need to do this, it is not an approach Redmayne Bentley is looking to undertake.
‘We think it’s a unique selling point, the more the industry goes one way, the more it becomes a selling point [for us]. We are willing to give up a bit of margin to do so, but we think it’ll be attractive and hopefully we will gain on revenue in terms of an increased client bank.’
Smaller is better
In contrast to Redmayne Bentley, for Tom Becket, whose firm Psigma Investment Management, currently has a buy list of 36 funds, having a concentrated list is the best way to go.
Although the buy list usually oscillates between 30 and 40 funds, he says it has become more concentrated over the last few years.
‘One of the key reasons is that we like to get to grips entirely with the manager. We have four full-time fund analysts, so we can all cover the funds extensively. This process allows us to ensure there are no nasty surprises and there is predictability in the returns.’
The company has a filtered universe of 150 funds that the team monitors on a regular basis, and a watch list of around 40 funds. The funds on the buy list are typically held for four years on average, so he says this means that around eight funds leave and enter the buy list each year.
He adds: ‘I question whether having a wide buy list is appropriate for the modern day regulatory approach in our industry. We make sure our investment team and managers all have the ability to see the managers they want to. When people go out and speak to clients about portfolios they don’t feel naked. I question whether that’s possible if you have a buy list of 100 funds.’