Close up on Mory Kaba’s double breasted Tincati suit jacket, pocket square, tie and striped shirt © Sophie Elgort
Over the years, Wealth-X has interviewed many wealthy individuals who say they have found it difficult to choose between potential investment managers. Many perceive wealth management firms to be very much alike. So the choice of which wealth manager to invest with is often reduced to a comparison of tiny differences; focusing on rapport, proactivity, and costs of services.
But this year’s survey of the leading wealth managers in the UK reveals that a wide range of potential returns have been achieved over a five-year period — and a huge number of asset allocations have been used within the same type of portfolio.
For the past eight years, Wealth-X Custom Research has collaborated with the FT to inform readers of the changes — including financial performance — within the UK’s wealth management industry.
This year, we received detailed responses from 45 of the most significant wealth managers in the UK. During 2016, the performance of a typical balanced portfolio significantly improved on 2015, following a period of strong gains in the FTSE 100.
Over the five years to December 31 2016, the FTSE 100 index gained around 25 per cent. However, those portfolios submitted by our leading wealth managers gained an average 44 per cent return, net of fees, over the same period.
While they have all beaten the benchmark, those five-year returns range considerably, from 28 per cent to almost 70 per cent.
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Download Private Client Wealth Management supplement with tables (pdf)
Given the huge variations in performance, one area that prospective clients should look at closely is investment strategy and typical asset allocations.
Asset allocations vary enormously for typical balanced portfolios. The three asset classes that make up, on average, three-quarters of most portfolios are equities, corporate bonds and government bonds. And the allocations to each of these vary hugely between wealth managers.
Equity allocations can range from 24 per cent to 79 per cent of a balanced portfolio. Corporate bonds can make up anything between zero to half, and government bonds account from zero to 38 per cent. And remember — this is before the investment managers pick which equities and bonds to invest in within that weighting.
What Wealth-X has found is that broadly speaking, there is a positive correlation between outperformance and the equity weighting of balanced portfolios. The more equity risk your manager has taken over the past five years, the greater the rewards will have been. And the reverse applies for those portfolios with higher allocations towards bonds.
With many stock markets around the world reaching all-time highs, the million dollar question is: how long this trend can go on for?
I won’t attempt to answer that — but the data tells us that average allocations within balanced portfolios have not changed significantly since 2015. This suggests that investment philosophies are fairly fixed within wealth management companies.
Of course, these allocations and strategies take into account the openness to risk of clients too. Considering the political upheaval witnessed in 2016, a more risk-averse strategy could easily explain portfolios with higher allocation to bonds, where the desire to risk higher returns has been trumped by a strategy to minimise losses.
As wealth and investment managers regularly tell us, past performance is no judge of future performance. But when choosing a wealth manager, make sure that their investment strategy, risk assessment and asset allocation is appropriate and matches your preferences. This could be a much stronger determinant of achieving performance objectives than other aspects such as rapport, proactivity and costs, even though these are often more prominent in our minds.
David Barks is a research director at Wealth-X Custom Research, the global provider of wealth intelligence and research partner of the FT Private Client Wealth Management survey