The savings and investment industry is littered with TLAs (three letter acronyms), buzzwords and a reasonable amount of obfuscation, some intentional and some not.  This uncertainty often begins at the point the investor, whether individual or institutional, starts to contract with the range of service providers supporting the investor’s investment programme.  However, clarity regarding the nature of the service being provided is helpful in understanding who is responsible for what aspects of the programme.  This understanding then supports more meaningful evaluation of the service provided as well as the charges, both the nature and the level, levied by the service provider.  These two inputs facilitate the assessment of the value for money of the service in question.

There are, at least, six steps to an investment programme:

1.  Identify an objective

The foundation of an investment programme is generally to identify an objective.  The objective might be specific (e.g. earn a return of x% p.a.) or a little less defined (e.g. maximise returns).  The objective might be accompanied by an expression of the investor’s risk tolerance, both the metric used and its quantification.  The investor might be supported at this stage by an advisor.  The decisions as to the objective and risk tolerance, if relevant, are taken by the investor.

2.  Allocate

The next step in the programme involves translating the objective and risk tolerance into allocations to a range of investments.  These allocations might be expressed in terms of exposures to specific asset classes, risk categories and/or investment products.  The investor might delegate the allocation decision to a third party, in which case this party is managing the decision for the investor.  Alternatively, the investor might take advice before making the allocation decision.  Sometimes this advice is specific, with just a single ‘recommendation’ being made for the investor to agree to.  Even in this case, the investor is undisputedly receiving advice.

3.  Select

Once the allocation decisions have been taken, the investment products/managers to populate the chosen allocation are selected.  The investor might decide to delegate the selection decisions to a third party, whereby the third party manages the decision for the investor.  This management might take the form of a service or a ‘pre-packaged’ product/fund.  The investor might prefer to take advice on the selection decisions though.  In common with the allocation stage, this advice might give a number of choices for each decision or be directed, having just a single ‘option’.  Whatever the case, if the investor is explicitly making or signing-off on the decision, the investor is receiving advice.

4.  Implement

The selection decisions are followed by the implementation thereof, often a time-consuming and laborious process.  Investors seem to increasingly be delegating this implementation process to third parties.  There are no investment decisions to be made during this stage, so no (investment) management takes place only implementation of the selection decisions.  Some investors take advice as to the actions required to achieve implementation but execute the process themselves.

5.  Invest

Following the transfer of the investors’ capital to the investment managers/products, the service subsequently being provided is unquestionably (investment) management.  The management company/product provider might do more than just trade financial securities, including managing a host of related (internal or external) service providers such as administrators, custodians etc.

6.  Monitor

Once the capital has been invested, the effectiveness of the investment programme is monitored.  Those parties managing aspects of the programme are likely to be monitoring the decisions under their control and making changes as appropriate/permitted.  Those in an advisory capacity will feedback to the investor, providing advice as to an ongoing course of action.  The investor will then make decisions based on this advice.

Institutional investors have historically taken advice on all of the steps set out above besides the investment management phase.  However, delegation of some or all of these steps (besides objective setting) to implementation agents and/or managers has become increasingly common.  There are a range of terms for the resulting implementation and/or management services, including: implemented consulting, delegated consulting, multi-manager, Outsourced Chief Investment Officer (“CIO”), Delegated CIO, fiduciary management and solvency management.  The same term often has different meanings depending on the providers being considered, resulting in much confusion.  This confusion might result in less than relevant comparisons being made in the course of selection and/or ongoing evaluation processes, wasting much time, effort and expense.

There is no single ‘correct’ way to support an investment programme.  Each investor will likely find an approach and combination of services, with related providers, that best fits them at a point in time.  This combination might change over time.  Whatever the case, the nature of the services being provided is more important than the names of the services.  If you’re not clear as to the service you’re getting how can you assess whether the service is relevant, effective, good value and/or competitive?