The Definition Of IFA Is Constantly Up For Review

[This article was first published in the June 2015 edition of ETF Report UK, our quarterly magazine for financial planners. To read the full issue and subscribe to the print copy, click here]

Clients generally take comfort from the fact that their advisers are independent, whole of market and academic-led, and that they have a wealth of knowledge and experience. Those also happen to be the areas where Quadrant Group seeks to excel.

Set up in 1994, the investment and advisory firm nestled at the end of London's Jubilee line has survived more than two decades of change and has grown to become a one-stop shop for its clients.

But success didn't happen overnight. One year after Andrew Pereira, managing director of Quadrant Group, joined the firm, he and his colleagues—founder Jeff Kay and partner Dominic Lobo—decided to radically overhaul the firm's structure.

Quadrant has since grown to around 150 clients with £140 million in assets under management.

Partnering For Success

The firm engaged the support of Tim Hale, chief executive of Albion Strategic Consulting and author of "Smarter Investing," published in 2006, to reshape its business. Hale shared research and academic papers over several years so that Quadrant's partners could "learn up" on the best way to invest.

"We felt there was something missing, and we needed the support of someone to guide us through and provide us with the evidence," said Pereira. "The issue is every single fund manager will have a view in terms of the market. We wanted to take an empirical view."

This led them, for the most part, to passive funds and ETFs.

"We wanted to create a completely passive approach whereby investments track particular indices as closely as possible to get market returns. We were after a robust, cost effective and more manageable means of ensuring our clients had a spread of assets in their portfolio, and each portfolio was matched to their level of risk," Pereira explained.

In 2000, Quadrant decided to build a central investment proposition for the firm, instead of each adviser building his own model portfolio for his client.

"We really felt that was inappropriate. We wanted to have some sort of uniformity, due diligence and governance, and the client would get the same experience no matter which adviser they were working with," said Pereira. 

High Level Financial Planning

There was much more work on the way. Alongside the investment practice, Quadrant built an advisory firm, focusing on holistic financial planning, which came into effect in 2009.

"We plan on goal-based outcomes," said Pereira. "We talk to clients not just about retirement but also about gifting, travelling, buying boats—things they want to do in their lifetime. Then we create life plans, financial plans, to achieve those goals. That was our starting point."

Pereira and his colleagues decided to focus on clients with portfolios of £0.5 million or more, and charge a simple fee structure of 1 percent initially and 1 percent ongoing. But the firm did not abandon its legacy clients, as Pereira says they had a duty of care, and continue to work with them.

Portfolio Construction

All of Quadrant's clients' assets are on platforms, either on Transact or AXA Elevate. The firm offers six so-called Astute Portfolios, which start at 0% equity for very low risk clients and end up with 100% equity, and are risk-based depending on each client's appetite for risk and objectives. The risk profiling technology is provided by FinaMetrica.

"Governance is important. We review our wrap platforms every two years, looking at cost benefits, and if we're able to save anything we pass it on to clients," Pereira noted. 

The portfolios have between 10 to 12 asset classes, currently excluding private equity and commodities, and are populated with passive funds, including index trackers and ETFs. 

There are just two ETFs in the portfolios at present: the iShares UK Gilts 0-5yr UCITS ETF (IGLS) and the iShares Developed Markets Property Yield UCITS ETF (IWDP).

"The [gilts] ETF was perfect because it was one to five years and it holds physical assets, and that's important to us; we feel very comfortable with that. And the same goes for the property fund," said Pereira. 

Despite the lack of ETFs versus tracker funds in the models, Pereira says he only has one issue with ETFs and that is holding and trading them on platforms. "ETFs held on platforms create a new element of cost, whereas some of the passive funds don't," he added.

The other funds in the portfolios are mostly from Dimensional Fund Advisors, the pseudo-passive fund shop that uses quantitative models to run its funds.

The firm operates around a quarterly investment committee, chaired by Lobo, where the team assesses the passive versus active debate and looks at new fund launches, as well as reviewing asset allocation. Hale also sits on the committee.

"There is always something new—a fund manager or ETF—that we bring to the table and we review. If it's brand new it will go on a watch list. If we believe it's right it will be added. If not, it will be taken away," said Pereira.

Independent — But For How Long?

The continuous assessment of active funds is imperative to maintain the firm's status as "independent." The Financial Conduct Authority stipulates that independent firms must be whole of market and look at every option for a client.

"We wanted a low cost, robust investment proposition and we felt the passive solution was right for our clients," said Pereira. "But month on month and quarter on quarter, we still open the door to ask what is the evidence pro and against and where do we stand, and are we doing what's right for the client?"

Pereira laments that the independent/restricted label and definition for advisers is an ongoing issue.

"It's [the definition is] constantly up for review. It would be good if the regulator made a [clear] statement," he said. "We are independent and want to remain so as we believe it adds value for our clients and partners. But there's always a question mark with that. And that causes an ongoing issue."

Pereira said he does not feel threatened or pressured by the likes of new online-based passive managers like Nutmeg, as he believes he works with a different client base.

"We sit in a market space where the clients that we work with need and want not only the financial planning piece but also the investment piece," he said. "We do both really well for our clients; we take their hassle and stress away."

Major Due Diligence

Pereira and Quadrant could give practically any of their fellow advisers who claim to carry out detailed due diligence a good run for their money. The team takes the process to a new level, scrutinising everything from fund structure to investment process and firm reputation.

Quadrant approached their preferred passive fund managers with a 12 page questionnaire, asking the managers to provide details on firm background, reputation, financial stability, potential conflicts of interest, employee policy, board of directors, depositary, auditor custodian reputation, as well as registrar and administrator's reputation. "How we got there was quite a lengthy exercise," admitted Pereira.

The list of queries continues at the product level: structure risks, its size, when it was created, liquidity risks, where it is listed, historic bid/offer spreads, market makers, investor concentration, largest holdings, currency risk, securities lending and index replication.

"For us and all our clients in our portfolios, our client security always comes first. Our starting point is providing a robust investment solution," he said. 

Looking To The Future

Pereira notes that Quadrant is still growing and seeking new clients, with a five year business plan in place.

"But we want to do it in a very structured and measured way. We adopt the same principles in every part of our business in terms of governance, structure and discipline," he said.