The goal of an insourcing relationship (also known as tailored models) is a genuine collaboration between an adviser firm and a discretionary investment manager.
It is categorically not just about white labelling the latter’s existing model portfolios; it is about creating bespoke models for the individual adviser firm, driven by the needs of their clients.
This is why the starting point for insourcing portfolios is usually the existing adviser firm’s models. This may seem somewhat counterintuitive: if a discretionary manager runs its own model portfolios, wouldn’t it make sense to impose its well-researched beliefs on the advice firm?
But the truth is there is no ‘best’ portfolio, or set of portfolios, for everyone. Just like advice needs to be personalised to clients to be useful, portfolios can be personalised to be more effective too.
This can be done by exhaustively looking through every fund or model portfolio already available, but in many ways, it is better to short-circuit the process and instead just design a solution for each of the adviser’s client segments.
In short, it is better to start with the clients and then build the portfolios, rather than starting with the portfolios and then seeing which (if any) works for the clients.
This is why we see insourcing as an evolution rather than a revolution. A constructive process involves sitting down with the advice firm, analysing the portfolios they have already built for their clients, and refining from there using the DFM’s investment expertise.
It is important to build an understanding of how and why the adviser firm has built its existing models the way it has and ideally to maintain the ethos behind them.
Then assess the risk characteristics to make sure the portfolios 'fly in formation' in terms of expected risk and return, and develop models that are genuinely bespoke and meet the needs of their clients.
Whatever the customisations and intricacies that are required (which can evolve), it is that risk separation that is the most important filter to get right.
Portfolios specific to an adviser firm
Only through an iterative process, starting with the advice firm’s current model portfolios, is it possible to make sure portfolios are unique to each adviser firm and have all the appropriate characteristics their clients require.
A good example would be an advice firm that has a lot of clients in decumulation. For this type of mandate, we would look to leverage our expertise in the income/decumulation space.
To do this we take into account the income needs of this segment of the advice firm’s clients and include a higher proportion of funds that generate income into the final portfolios.
In another example, a UK home bias (an over-allocation to UK assets) is a common inclusion in existing adviser portfolios.
