Ensuring you get the right fit financially

Getting the right financial fit | DragonImages - stock.adobe.com

Since it’s high summer and the all-but deserted squares and crescents of the West End of Edinburgh suggest that many folk are off on their holidays, let’s start with a story from the travel industry. 

Time was – and we’re talking back in the 20th Century here – when overseas trips would be organised through a travel agency. At the highest end of the market, this would be a seasoned outfit that would organise accommodation, flights, cars, safaris and suchlike through a trusted network of contacts. At the other end of the scale, you’d buy an all-inclusive package, including plane, hotel, and copious egg and chips. One would be an utterly bespoke, the other a one-size-fits-all, but they were both packages and there was a lot of commission involved.

These days, there’s more choice in travel – you can be your own travel agent, or you can choose to pay the professionals – and the financial services profession is finally catching up.

The gap between the investment industry and the client is narrowing. Through developments in technology, we are now at a stage where you can be your own fund manager without needing a suit, or (this is the clever bit) having to pay the person who wears the suit.

The investment industry has helped millions of Scots make provision for their futures over the past decades. But, if we’re honest, it has struggled to keep up with the technological advances we’ve seen in other industries. As a result, your investment solution either tends to be one-size-fits-all in classic funds, or highly bespoke and expensive. You don’t get much of a choice beyond that. We are now coming to a position that happily offers the trifecta of greater personal choice, a better understanding of your investments, and a reasonable price.

Technology on its own is not the solution. Yes, it reduces costs, but it can also give the impression of limitless choice while simultaneously offering little tailoring or guidance. It can leave us out in the cold.

So instead we ask how true personalisation can be available to help us to provide better choices in guided investment, without incurring huge costs. What if the traditional cost of bespoke investment solutions – often 2 per cent per annum of total investment or higher – could be halved?

To answer that, we first need to look to the USA, where a technique called Direct Indexing has been taking the industry by storm. This involves index investment – so following, say, the S&P500 – but instead of buying a fund, technology allows investors with even modest portfolios of $5,000 to buy all the constituent elements of the index directly, in the right proportions and at a very low cost.

This capability has now come to the UK, thanks to our technology partners Fundment. We call it Custom Indexing. Effectively this allows us to replicate an index – let’s say the FTSE 100 – without having to buy a fund. But instead of just getting what’s in the index, we can screen stocks using filters. Clients then have the option to exclude individual securities – perhaps you already have a shareholding in a particular company. The end result is that you have a personalised version of that index without the need to be in a fund.

Who can this be of use to? Those who favour low-cost index investing but also want an element of personalisation without incurring the bespoke costs. If you work for an energy company, you may already hold shares in this sector through your employer. A classic index might increase your exposure to the sector by replicating them. Custom indexing can mitigate this by filtering those shares out.

ESG (Environmental, Social, Governance) investment is an area where personal preference is paramount and should be encouraged. It is also an area where great power can be used in a way that ensures everyone benefits. ESG preferences are different for different people. Felicity wants to run a fossil-free portfolio; Fred wants to avoid tobacco. Olivia is happy to include defence stocks; Oscar doesn’t want fast fashion in his portfolio. We can now do this without inefficiency and cost.  

What’s more is that we can do this in a way that allows us to model the likely consequence of these choices for clients so they better understand them.

Custom Indexing is about gathering information and taking action to ensure your investments match your needs, attitudes and beliefs. And it all happens in a fee-efficient manner.

Calton is the only financial planning firm in the UK to offer this, allowing you to get as far off the beaten track as you feel comfortable.

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