Our Investment Management Solutions

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1 Our Investment Management Solutions The need to carefully invest and plan for financial assets to ensure life- long wellbeing and fund care requirements after an accident, illness, negligence or a lack of mental capacity or the challenges faced by those in later life is paramount for our clients. It is therefore vital that out clients financial assets work hard for them, both at the present time and in the future. It is our aim to ensure the long- term care and wellbeing needs of vulnerable individuals are catered for as much as possible by careful investment management though our independent financial advice and investment management solutions. Our full range of tried and tested services has given thousands of our clients and their families more control over their future - control that they may have lost due to a life- changing event, injury or illness. We use a risk- based approach to providing investment management advice as detailed in this document. We discuss this openly with our clients to identify and understand their ability, willingness and need to accept risk in order to achieve their investment goals. Our consultants look to align our client s attitude to risk to their financial position, needs and objectives. Our specialist consultants are able to meet individuals and their families, trustee or deputy in their home, care facility or office as suits thanks to our national spread of offices and consultants in Manchester, London, Leeds, Bristol, Birmingham and Cardiff. Our Solutions Having established, questioned and explained our client s attitude to risk, we then provide them with a bespoke Investment Management Solution. We believe that the most important factors in providing this service are having an in- depth understanding of our client s individual circumstances and our ability to take an all- round view of often highly specialised needs. We are a whole of market, independent financial advisory firm. Our investment committee meets regularly to discuss investment solutions and identify the best investment managers from around the world. Often but not exclusively, we may use specialist Discretionary Asset Managers to invest money on our client s behalf. We do this to allow client s peace of mind around the monitoring of their investments on a daily basis, something we believe no financial adviser can do alone. We also offer clients a guaranteed investment via a selection of investment bond providers. Before offering this service we ensure our clients understand the additional costs involved in providing these guarantees and the processes involved.

2 Tax planning is essential to ensure that awards work as hard as possible to achieve client objectives. Every client is different so our investments are offered within a range of tax wrappers to ensure that our consultants and investment partners can make the most of the tax allowances relevant to each client. We take great pride in the communication of our services to our clients and wherever possible use simple visual aids in order to encourage client engagement. We have found that when we encourage such engagement client outcomes improve due to their enhanced understanding of their financial situation and requirements. Asset Allocation & Diversification Investing is all about risk and return. Most rational investors would prefer to maximise their returns, but every investor has his or her own individual tolerance for risk. Moreover, the potential returns available from different kinds of investment, and the risks involved, change over time as a result of economic, political and regulatory developments as well as a range of other factors. Asset allocation is the process that seeks to balance these risks and returns to meet the requirements of investors, and to manage that balance actively as conditions change. Diversified portfolios can incorporate a wide range of different assets, all of which have their own characteristics. Understanding and explaining these characteristics clearly to clients in their language is a key step in our investment process.

3 Performance Statistics This data highlights the differences over time of the returns of the various asset classes. Our investment philosophy is to provide clients with a blend of these asset classes as part of an investment solution. Our aim is to align the volatility of the recommendations with our discussions and assessment of client s needs, objectives and tolerance to risk. Our investment recommendations are designed to provide an asset allocation that will generate targeted returns without the risk of investment into a single asset class but retaining these needs, objectives and client s risk tolerance at its core.

4 Investment Management Committee The IMC meets every month to review and control the Frenkel Topping investment process. This includes the process and performance review of our investment partners. The IMC provides a control point around the provision of advice via Frenkel Topping. The monitoring of the asset management companies used and the solutions they provide helps us to ensure that all clients are offered a consistent service proposition. In order to assess and review our existing and prospective investment partners the IMC uses the following process: Once an asset manager has been passed through the investment committee it is expected that they conform to our service requirements. The provision of sales material to aid client s understanding of their processes is a key factor alongside the provision of regular face- to- face updates for all Frenkel Topping staff.

5 To research the whole of the market and review our strategic investment partners Frenkel Topping use independent research tools alongside a final screening process designed by our investment committee, a sample of which is shown below. We look at four key areas: Business Compliance Performance Administration FTL DFM HEAT SCORE SCREENING BUSINESS COMPLIANCE PERFORMANCE ADMINISTRATION Size of AUM Service Capability Availability, Quality & Range of White Labelled documentation Institutional management level fees Innovative approach Open to new ideas Direct & Indirect Investment options Capability to adapt investment models, literature & systems to FTL needs Buying power & Critical Mass Act within FCA Conduct Of Busines Rules & Mifid requirements Clear & Concise TCF policy Documented disaster recovery plan Risk controlled, clearly defined investment process Strength of Research Capablilty & Resource Level & Consistency of performance across varied market conditions Range of standardised risk profiles Managed cash portfolio Provide bespoke capital protected strategy Availability & quality of past performance sales aids Quality of Designated client support team to cover FTL requirements Quality & presentation of client documentation Quality & Availability of macro economic & market commentary Level of Review meeting info - performance figures, benchmark figs, risk/asset allocation Willing to attend review meetings Attend quarterly meetings at FTL to discuss service, performance and outlook

6 Investment Advice Process The methodology of providing financial advice is set out in three distinct areas: Initial Meeting completion of Engagement Documentation and setting Key Objectives according to Risk Tolerance Financial Planning Advice and Recommendations - in line with Client Circumstances and Key Objectives Implementation & Review Having fully completed all of the engagement documentation and set out a client s key objectives within the What are your Objectives? section of our reports the next stage of the process is to provide a recommendation. These recommendations will be linked to client needs, objectives and attitude to risk, as documented in the risk report, and their understanding of investment products. When making a recommendation our consultants assess the following areas: What are the client s short, medium and long- term financial objectives? What types of investments are suitable to meet these objectives? Client s attitude to investment risk Cash Flow Modelling Is there an immediate need for income? Is there sufficient capital held as an emergency fund? Are any tax wrappers appropriate? What are the underlying charges of the investments? Post Settlement Team It is also important to review any investments on a regular basis to ensure that the recommendations made continue to meet client s needs. Our Post Settlement Team is dedicated to providing these reviews and the review process specific to the recommendations is detailed separately. Our Post Settlement Team is proud to report a 99% customer retention rate for the sixth year running in 2014.

7 Risk Based Investment When providing advice risk forms an important part of the suitability of the recommendations made. In order to ensure that the advice given meets needs and objectives we must consider our clients: ABILITY to withstand risk - What would happen if the investments were too risky and lost money? NEED to take risk - Will the investments grow or provide income that is sufficient to meet client s needs? WILLINGNESS to take risk - How do clients feel personally about risk & would falls in the value of investments make them anxious or would they be comfortable with short term falls? The most appropriate investment solution would fall somewhere in the middle of all of these areas as demonstrated in the diagram below. Oxford Risk Part of our role is to consider the types of investment return required and the level of risk that clients are prepared to accept to achieve their objectives. Our risk profiling process includes an analysis provided by Oxford Research via their risk- profiling questionnaire. This questionnaire looks to consider the relationship between returns and the risk clients are prepared to take, compare it to what is required to meet their objectives and to define any disconnect.

8 Defining the relationship between risk and return is important because: Taking too much risk could result in higher volatility than required to meet objectives Not taking enough risk could allow the funds to run out during the lifetime under consideration Cash Flow modelling and Risk profiling is important for professionals acting on behalf of others as it provides an opportunity to discuss and document how investment decisions have been reached and what the expectation of investment returns and risks are going forward. Delivering Our Investment Advice Fusion Wealth Simple and Efficient Technology Fusion Wealth is a trading platform through which we invest client awards. A platform is not a product rather a route to purchase for several services which is efficient, scalable and repeatable. A key benefit of our proposition is accessibility to a range of global asset management firms for every client s portfolio. The ability for our clients and introducers to access a range of approved providers, offering different but complementary investment services and to switch between those strategies quickly is a great benefit. The platform also enhances our ability to manage the risk in our client portfolios as it contains live portfolio data on risk and performance, including investment ratio analysis. This is enhanced by our link to a multi award winning, independent investment research tool in Financial Express analytics. The risk management system we use via Enable, our Client Relationship Management system, allows us to provide peace of mind that client s investments are not moving away from their agreed, cash flow aligned risk profile. Fusion Wealth allows us 24- hour access all portfolios with line by line access to live risk and return data for all holdings.

9 Our Core Investment Partners The Fusion Wealth platform is open to many investment providers but we have selected a core range of providers to work with us in the management of client awards. We refer to this as best of breed advice and we combine the investment and risk management strategies in goals based portfolios for our clients. > SEI SEI manages and administers over $150 billion of client assets across the globe. Its straightforward approach to investing via seven risk- targeted portfolios provides an excellent vehicle for the management of client awards. It has featured in the vast majority of our client portfolios alongside other core managers since SEI offers access to a truly global asset management strategy which employs some of the world s best active fund managers. SEI use a Manager of Manager approach to dictate specific investment mandates to the investment management companies they feel best suited to manage a specific asset class e.g. Invesco, Four Capital Partners, Jupiter, LA Capital and Lindsell Train for UK Equity mandates. In an environment where active manager charges are a key factor in delivering strong performance the strength of manager research offered by SEI is invaluable. The robust risk management systems in place at SEI also provide peace of mind that client s funds are working hard to achieve targeted returns whilst the management of downside risk is monitored around the clock. SEI use several layers of risk management in their portfolios including a risk mandate for each manager employed. SEI s Risk management team develops and monitors the risk guidelines for client funds. Following investment industry best practice the Risk Management Team is separate and independent from the investment strategy teams. > Canaccord Genuity Canaccord is one of Canada s largest investment banks and it offers access to a team of world class investment managers and portfolios. Canaccord Genuity Wealth Management looks to meet investors' individual needs by searching the globe for investment opportunities. Drawing from a global network it can look at both the bigger picture and the finer details enabling delivery of long- term investment strategies, as well as informed, near- term solutions that make a difference locally to wealth management clients in the UK, Guernsey, Jersey, the Isle of Man and Switzerland. Canaccord currently has over $30 billion of client assets under management

10 Canaccord s Risk Enhanced Multi Asset Portfolios (REMAP) provide an innovative and successful method of managing client risk and protecting returns by actively seeking to deviate from benchmark asset allocation at times of market stress. Although Canaccord uses Wealth Management Association (WMA /formerly APCIMs) benchmarks its asset allocations can vary widely in order to place a risk cap on client portfolios. The company often describes its investment approach as boldly cautious and the risk- adjusted returns justify the statement. > 7IM 7IM is a UK based investment provider managing over 8 billion in client assets. 7IM s active passive approach to managing its portfolios involves active strategic and tactical asset allocation. Many investment professionals now believe there is limited value in active fund management strategies as, after the deduction of charges, performance is often less than that generated via a passive strategy. Frenkel Topping has used 7IM s portfolios in client investments since 2013 bringing an alternative method of investment management that complements those of our other active core investment partners. The implementation of passive instruments can deliver excellent performance at a reduced cost which preserves client s returns after tax and charges. > Charles Stanley Charles Stanley is one of the UK s leading investment management groups with a history dating back to Today it manages in excess of 20 billion in client assets with over 300 highly qualified Investment Managers throughout the country. We use a direct stocks and shares portfolio service via Charles Stanley which delivers excellent diversification and risk management to our clients at a lower cost than more fund orientated portfolios. Where clients have over 300,000 to invest in a single strategy, these portfolios can feature alongside our other core partner strategies in one blended portfolio. > Alternative Providers It is important to note that we are in no way tied to our current core investment providers. We conduct regular due diligence on a wide range of asset management firms, many of whom are scored and filtered in our DFM heat score matrix. We work hard to stay up to date on changes in the processes and solutions offered by alternative providers in order to be able to add them to our core range should we approve them.

11 Investment Strategies Managed Volatility Investment (Canaccord Genuity & SEI) Due to the nature of the clients we encounter and the need to manage awards for what are often long periods we understand the benefit of actively managing volatility within client portfolios. We believe that the management of volatility in our client s portfolios should be used as far as possible to attempt to deliver a smoother investment experience. Research shows that much of the management of portfolio risk can be managed by diversification of low or non- correlated assets. However, additional mitigation of risk can be achieved by a risk overlay or strategy to actively manage client funds in risk efficient framework. How does it work? Portfolio managers can aim to deliver less risk to clients via managed volatility strategies. Certain mangers may use quantitative methods to do this, such as the use of algorithms, to move client assets to safer and less volatile assets during periods of market turbulence or stress. This is the kind of managed volatility strategy employed by Canaccord Genuity in its Risk Enhanced Multi Asset Portfolios (REMAP). Other methods of managing volatility may include the purchase of specific assets or funds to minimise portfolio drawdown in volatile markets, using portfolio insurance (hedging) and the management of risk budgets. Risk budgets are frequently used to allocate the risk of a portfolio by decomposing the total portfolio risk into the risk contribution of each component position and weighting the asset allocation accordingly.

12 The chart below demonstrates how a portfolio manager can aim to manage the risk, as measured by standard deviation, in a portfolio. The manager will aim to cap the volatility experienced by the fund in order to produce a more consistent return for investors. Most investment managers use some form of volatility management in their portfolios to a greater or lesser degree. Some managers, such as SEI and Canaccord Genuity, actively market their strategies, in their case Stability Focused and REMAP portfolios respectively. However, often the volatility management is not actively marketed and therefore, via the Investment Management Committee, Frenkel Topping analyse and review the use of such strategies in all of the investment management options we have to offer our clients.

13 A simple example of the benefits to client outcome of a risk (volatility) capped investment strategy as opposed to a standard risk rated investment approach is shown below. Note that the black line is a measure of the risk in a portfolio, not the returns. Risk Rated This chart shows a client s investment risk can fluctuate over time leading to a poor outcome. In this case the client would have spent more than half of the investment term at an unsuitable level of risk. Risk Targeted This chart demonstrates the outcome for a client invested via a risk capped management strategy.

14 Multi Manager Investment (SEI) A Multi Manager strategy is managed by more than one investment manager, each having a particular specialty. The goal of the multi manager is to make investment decisions based on multiple professional opinions rather than relying on a single person to have comprehensive knowledge of investment options. SEI are pure Manager of Managers investors as they employ the investment managers they use to run money the way SEI want them to (according to a mandate set by SEI). The mandates are held within a unitised fund structure largely owned by SEI. As shown above there are currently up to 70 investment mandates in SEI s portfolios often delivering access to over 7,000 underlying individual holdings

15 Goals Based Investment Goals- based investing enables our consultants to match different investment portfolios to each client goal depending on the time horizon and level of risk they are willing to assume. A goals- based approach may help clients feel more confident that they have the right investment solutions to achieve their goals and reduce emotional decisions that could hinder long term performance. The benefits of a goals based approach are clear: Focus on what really matters staying on track to achieve goals May be less likely to be affected by and react to ups and downs in the market Success is measured against clients financial goals Clearer understanding of the risks of each individual goal Frenkel Topping offer goals based investing as an option for our clients. Often, due to the nature of personal injury and clinical negligence claimants with specific care and medical needs, our advisers are called upon to provide an investment strategy covering a wide range of specific objectives.

16 Goals- based investing allows us to provide a level of clarity to our clients around how we are working with them to achieve these individual and specific objectives as illustrated below. Define and Prioritise Goals Establish Risk Measures to Each Goal Best Strategy for Goal Risk Management Care & Equipment Preserve Wealth Defensive Portfolio General Savings & Investment Holidays Balance Risk & Growth Grow Wealth Moderate Portfolio Aggressive Portfolio Passive Investment (7IM) Diversified passive investment involves the blending and tracking of investment market indices within an asset allocated framework. Investment managers adopting a passive approach believe it is difficult to beat the market by taking overweight or underweight positions relative to its constituents. Instead the manager will buy securities to closely track an index.

17 Traditional funds created by passive managers will mirror the securities in the index they wish to track in two ways: Replication Holding every security in an index, say the FTSE 100 Index, in the same proportion as the index Sampling Using complex mathematics the manager selects and holds a sample of securities from the index he wishes to track Passive managers look to spread risk widely within a market to reduce the effect of company or sector specific losses. However, market risk (systematic risk) is still present and a fund will track indices down as well as up. As passive funds track their target indices, rather than actively trading for outperformance, their fees and operating costs are generally lower than those charged for actively managed funds. However, as the passive fund aims to track the index, when fees are deducted it is very rare for the fund to return more than the index it tracks. Smart Beta When a company s share price rises faster than the rest of the market, this means that it has a bigger weight in a traditional index. When its share price falls, its weight reduces. A strategy that attempts to match the cap- weighted index is thus buying high and selling low; put another way, it has a big exposure to the most expensive stocks. Smart Beta strategies aim to passively track markets whilst avoiding a cap weighted approach. A variety of Smart Beta strategies exist. The simplest is to give each market constituent equal weight. If there are 100 stocks, then each would have a weighting of 1%. A second approach, dubbed fundamental indexing, is to weight each company by its financial characteristics sales, dividends, assets or cash- flow. A third is to weight the index to reduced volatility stocks. A fourth is to use the momentum effect to buy stocks that have recently risen in price. A study by the Cass Business School found that all these alternative indices beat a cap- weighted index over the long run, and had a better risk- adjusted return. Interestingly, the study also found that a system that randomly chose constituent weights for stocks, like chimpanzees throwing darts at share- price listings, beat the market.