Investment Process. Vers 1.2/2013 INVESTMENT PROCESS

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1 OCTOBER

2 Investment Process The following pages provide more detail about how we implement the process outlined above. Our Investment proposition is at the very core of our client service and it is crucial that all parties have a full understanding of it before we produce any client recommendations. 2

3 Contents Investment Process... 2 Investment Process... 4 Introduction... 4 Engagement... 5 Investment Philosophy... 5 Client Segmentation... 9 Client Agreement Onboarding Process Discovery Assessing Client Understanding of Risk Analysis Cashflow Modelling Product Selection Asset Allocation Investment Solution Presentation Implementation Monitoring Appendices

4 Investment Process Introduction This document is a reference point for understanding how we provide investment advice to our clients. It is used and understood by everyone within our business, not just those responsible for the provision of advice, as it summarises not only our processes but our core beliefs and philosophies. Each client is different, so we understand that following pre-defined processes and criteria is not suitable in circumstances where a better outcome could be achieved by alternative means. Conversely there is a distinct advantage to both the client and our business in providing some guidelines and controls around investment advice, as this ensures that advice is given in a consistent, controlled and efficient manner. This is the purpose of a written Investment Process. The Investment Process itself is controlled by the Investment Committee which meets at every quarter. Changes to this process can only be made by the Investment Committee, or in exceptional circumstances by the Managing Director and Compliance Oversight. The Terms of Reference that the Investment Committee operates under are included as Appendix 1. 4

5 Engagement Investment Philosophy An investment philosophy is the overall set of principles or strategies that guides and steers our investment decisions. It helps us to simplify a complex industry, allowing us to concentrate on our relationships with our clients, safe in the knowledge that we are doing our best to protect and grow their assets. While investment performance hinges on many factors out of our control, most notably the return on markets, we can control other factors. These are the ones we deem the most important in creating and managing a portfolio such as the types of funds you invest in, the cost of the investments you choose and what you look for when choosing the investment companies you do business with. It is important we can justify investment decisions to clients and make it clear why we have invested their money in a particular way. Our philosophy summarises our approach. We provide independent advice We chose to remain independent because we believe that it is important that we are not restricted in any way at the point we recommend a product or fund to clients. Whilst we may not believe certain types of investment are suitable for clients, because of their structure or inherent risks, it is important that we are fully aware of them, understand the circumstances where they may be relevant and can advise you appropriately if a client already holds such investments. We have committed to maintaining our knowledge in all product areas and this forms part of our Continuing Professional Development (CPD) programme. It is also important to us that we do not have any contractual relationships in place which require us to place business with any particular provider of products or funds, as this would compromise our independence and create a conflict of interest when providing advice. 5

6 We believe in diversification One of the most important views to arise from modern portfolio theory is that investors should avoid concentrated sources of risk by holding a diversified portfolio. There are three primary factors which influence portfolio performance; asset allocation, stock selection and market timing. Diversification of an investment portfolio across a variety of different low correlated asset classes should help to reduce the overall level of risk compared with, say, a portfolio which only includes bonds. For example, the inclusion of a small investment in a higher risk fund invested in a completely different area, in a portfolio comprising solely of UK bonds, can actually serve to reduce the overall level of risk in the portfolio when viewed as a whole. This is because the behaviour of the higher risk fund differs to that of UK bonds in how it reacts to varying economic events. An effective combination of different asset classes can significantly reduce the risk of a portfolio without reducing its potential for growth. We believe that cost is an important investment criteria We believe that cost is a critical factor in selecting a product or investment fund. We recognise the need to select companies with sufficient financial strength and adequate levels of service, however cost is one of the few known criteria at outset and it has a demonstrable impact on future investment returns. This informs both our asset allocation strategy and fund selection criteria. In addition, every time an investment is bought and sold costs are incurred. These include the bid/offer spread, price effects, and stamp duty, and are not included in the Total Expense Ratio (which assumes the funds are to be held and not traded through the period). We aim to keep the Portfolio Turnover Rate, as low as possible using strategic asset allocation, and limiting the movement of funds wherever possible. The cost of a higher portfolio turnover is often hidden, taken out of investment returns We believe in strategic asset allocation One of the most important investment decisions we make for clients is what assets to invest their money in. Depending on their financial goals we will build a corresponding mix of assets that produces the most appropriate level of risk and expected return. Some academic research suggests that for a long-term buy-and-hold investor, asset allocation accounts for about 90% of total portfolio returns, compared with just 5% for individual stock selection. However, other research suggests the contribution from asset allocation may be around 60%. Either way, the key point is that the largest part of the return of a portfolio is based on being in the right asset classes. The reason why we emphasise asset allocation so much is Modern Portfolio Theory (MPT), a mathematical quantification of the benefits of diversification. It states that by combining different types of assets the collective investment will have a lower level of risk (defined as variance in investment return) than if the money was held in a single investment. This works through the assumption that the risks of different assets are not perfectly positively correlated and therefore returns may move independently from each other. For example, during a recession, equities usually fall in value, but bonds often rise; therefore a diversified portfolio will be less volatile than one made up exclusively of equity securities. The importance of this theory for our firm is that it states that the vast majority of the behaviour of a portfolio is due to the asset allocation. Famously, in 1986 Gary Brinson, L. Randolph Hood and Gilbert Beebower (BHB) analyzed the returns of 91 large U.S. pension plans between 1974 and 1983 and concluded that asset allocation explained 93.6% of the variance in returns. Our asset allocation is governed by our Investment Committee and contained in Appendix 7. 6

7 We adopt a core passive, and satellite active, investment approach We believe that cost is important to the performance of a fund and there are only limited situations where we believe there is added value an Active Fund Manager can bring. As a result we believe in using a low cost, typically passive investment which keeps down the total cost of the portfolio for assets where we believe there is limited opportunity to find alpha returns and therefore little value in paying a premium for active fund management. Conversely, for certain assets, we believe there is value in using an active fund manager to create returns which will beat the market return. By using a predominantly low cost passive investment approach we keep the total cost of the portfolio relatively low, even when the small amount of more expensive active management is included. There are both advantages and disadvantages to active and passive investing. Advantages of passive investing: Passive funds tend to have lower charges than active portfolios. Since they simply replicate the index, there is little intellectual input and thus management fees are relatively low. Risk of significant underperformance versus their chosen index should be limited. Trackers are also ideal for investors that may not be able to carry out due diligence to ascertain which active managers best suit their needs. Passive government bond portfolios can be an efficient way for pension funds to match assets and liabilities. There are also risks in passive investing, which our Investment Committee need to keep under review: It can be difficult to discriminate between trackers. Since they are required to mimic their benchmark indices, there is no simple way to tell whether one index fund is better than another. One of the very few ways to compare index funds is to use the tracking error, which is a measure of the degree to which a fund s performance deviates from that of its target index. Tracking errors can vary widely between different passive funds. However, tracking errors are backwards looking and complex and can be calculated in different ways, making comparisons difficult. Passive funds tend to buy at the top of the market. All indices are rebased regularly, with stocks moving up to take greater weightings, entering the index for the first time or dropping out completely. As a stock becomes a greater proportion of an index, a tracker will take a greater stake. However, this tends to happen after a company has performed well, which means that the tracking fund is buying as the share price increases, and this can be exacerbated by market trends or investing fads. The dotcom boom of 1999 illustrates a risk with passive investment. The fever for technology stocks led to an increased representation of technology stocks in many indices. However, indices rebalanced towards tech stocks just as the market hit its peak in March Consequently, while passive investors would not have gained fully as these shares shot up in value (as some were not significant parts of the index), they were fully exposed to the technology sector just when the bubble burst. Indeed, this exemplifies one of the key criticisms of index funds: they replicate past performance rather than looking at the future. Advantages of active investing: 7

8 These types of funds offer different investment aims rather than just tracking the market as a whole. Therefore by managing investments actively, investors can choose to manage volatility by investing in funds that are deliberately targeting higher or lower levels of risk, as they are not tied to the index sector weightings. As passive funds tracking indices are rebased regularly, with stocks moving up to take greater weightings, entering the index for the first time or dropping out completely, active managers can take advantage of these movements by buying stock before they enter an index or selling as a stock looks likely to leave. Investors may disagree with the efficient market hypothesis, and therefore believe that there is the ability to generate additional performance by finding undervalued companies in the market place. Investments that are not highly correlated to the market are useful as a portfolio diversifier and may reduce overall portfolio volatility. Some investors may wish to follow a strategy that avoids or underweights certain industries compared to the market as a whole and may find an actively-managed fund more in line with their particular investment goals. For instance, an employee who receives company stock or stock options as a benefit may prefer not to have additional funds invested in the same industry. There are also risks in active investing, which our Investment Committee need to keep under review: The most obvious disadvantage of active management is that the fund manager may make bad investment choices or follow an unsound theory in managing the portfolio. The fees associated with active management are also higher than those associated with passive management, even if frequent trading is not present. Large managed funds can begin to take on index-like characteristics because they must invest in an increasingly diverse set of investments instead of those limited to the fund manager's best ideas. 8

9 Client Segmentation We separate clients out into different levels of service based on a number of factors. Whilst provisionally, the amount of a client s investable wealth which we manage, and the time required to advise on and manage that portfolio will influence the decision, it is the client s choice as to which service he or she requires. The following matrix sets out our current process. (Please note that this is an abbreviated version. For a full details please refer to the Client Agreement) Newsletter Seminar Invites Telephone Access to Adviser Transactional Calder Hodder Ribble P P P P Ï P P P P P P P Charged at hourly rate Initial Planning Review P P P Portfolio Valuation Asset Allocation Review P Annual Ï P Annual P Annual Face to Face Review Meeting Ï P Initial Charges on Lump Sum Investments On-going service and administration Costs 2% subject to a minimum of 1,500 on investments up to 500,000, 1% on the next 500, % Thereafter Annual 2% subject to a minimum of 1,500 on investments up to 500,000, 1% on the next 500, % Thereafter 0.75 % The greater of 0.75% or 150 P Six monthly P Six monthly P Six monthly 2% subject to a minimum of 1,500 on investments up to 500,000, 1% on the next 500, % Thereafter The greater of 0.75% or 250 P Quarterly P Quarterly P Quarterly 2% subject to a minimum of 1,500 on investments up to 500,000, 1% on the next 500, % Thereafter The greater of 0.75% or 450 The decision as to which type of investment solution is recommended to clients will be made at a later point in time, once we have completed the client discovery phase and analysed the client s financial circumstances. However, this will also take into consideration the degree of future involvement the client wishes to have with ongoing investment decisions, attitude to risk and the likely investment term. As a guideline these are the types of investment solution we expect to use with clients based on the frequency of contact required. 9

10 The following matrix sets out our current process. Investment Capital Annual Reports Annual Reports, a need for income, Capital Gains Tax allowance usage Annual Reports, a need for income, Capital Gains Tax allowance usage, Wants regular fund manager meetings ,000 Platform Risk rated Fund of Funds 150, ,000 Platform Risk rated Fund of Funds 500,000+ Platform - Model Portfolio See glossary for an explanation of these terms Platform Risk rated Fund of Funds Platform - Model Portfolio Discretionary service n/a Discretionary service Discretionary service The main benefits, both to clients and our business, of introducing this segmented approach to investment solution are as follows: 1. A consistent approach to fund selection will ensure that all clients receive the same level of advice irrespective of which adviser they deal with. This consistency, coupled with the clear audit trail provided by the attitude to risk assessment and the Investment Committee s reviews, will also ensure that this advice can be justified at all times. 2. Managed and multi manager funds will allow all clients to benefit from the advantages of well diversified portfolios irrespective of the size of their investments. 3. Reaction to market changes etc can be undertaken by the fund managers on a timely basis, for all clients. Personalised portfolios are slower to react and switches will usually require client consultation and consent. The delays arising from this could result in significant losses. 4. Rebalancing to ensure that the overall asset allocation of the investment remains appropriate to each client s attitude to risk takes place at fund level which requires less input from the adviser and provides a more cost effective and immediate service for the client. 10

11 Client Agreement It is a requirement that all clients complete and sign a Client Agreement before we commence work for them. Whilst we will meet with clients at our expense to explain our services and philosophy, no further work, including the discovery process, will commence without a written Client Agreement. The Client Agreement confirms amongst other things: What service the client can expect now and ongoing How much the client will pay for those services Frequency and nature of payments to be made A copy of our Client Agreement is included in Appendix 2. 11

12 Onboarding Process Once a Discovery Meeting has been arranged with the client; Confirmation of the meeting will be sent in a letter to the client, enclosing the Discovery Meeting Pack. This will ensure that the first meeting is as productive as possible for the client and includes the; Agenda, Discovery Meeting Checklist Client Journey Flow Chart and Definitions Astute Family Office Leaflet Introducing Your Family Office Team 12 Outcomes of Good Financial Planning At the Discovery meeting clients can expect to discuss; the Astute Service and how this will benefit you. the compliance documentation and the client agreement their Financial and Personal circumstances, their investment risk profile, our Investment Policy Statement, complete Statutory Anti-Money Laundering Identity Checks, discuss their personal end financial ambitions and goals, provide formal authority to enable us to contact companies for information which will help us analyse and monitor their existing investments. Once a Client Agreement is received, clients can expect the following; Provision of all advice and service in accordance with the Client agreement A leaflet Introducing Your Family Office Team if this has not already been provided, which details the contacts within our firm. A telephone call within 5 working days asking for any further information that is required at this stage An invitation to client seminars usually held annually. Etc 12

13 Discovery We offer clients the following types of service Full financial planning a review of a client s entire financial affairs. It is essential we capture as much and as detailed an understanding of a client s circumstances and objectives as possible to provide this service. Limited advice a specific review focussing on part of a client s financial situation to address a specific need e.g. a pension transfer, or advice on a particular amount of money. This is only undertaken where directed by and agreed with the client in writing, with full knowledge of the implications. Group Personal Pension Plan advice where we advise an agreed number of employees solely in relation to their investment contribution to a group scheme. We capture data formally within a fact find. These are used for formal record keeping purposes and it is important that they are accurate and complete. Where a client does not wish to disclose certain information the implications of this should be made clear verbally at the time and confirmed within the suitability report. In practise our Fact Find is normally completed by the adviser during the meeting (or occasionally by the adviser, in the course of a telephone meeting). For clarity it should be completed electronically or completed manually and then typed up following the meeting. A copy of the factfind can be ed or posted to a client prior to a meeting, to enable them to gather together the types of information which will be required, or to partially complete prior to the meeting. This may save time and enable a more productive meeting. However if it is provided to and completed by the client prior to the meeting, then care should be taken to ensure all relevant information has been provided and the reason for providing a particular piece of information can be explained if required. (For example - details around a previous marriage). The completed fact find must be signed by the adviser and the client. A copy of this is then scanned at our office and a further copy is provided alongside the suitability letter to confirm the basis on which the advice was provided and to enable the client to inform us of any amendments, errors or omissions. We include copies of our current fact finds in Appendix 3. Data is also stored in our Customer Relationship Management (CRM) systems. Our CRM s are Plum Software and Truth Software. Within these systems we record all the data from the fact find, including personal, financial and policy information. Consent to hold client data electronically is obtained through our Client Agreement. Assessing Client Understanding of Risk As part of the know your client exercise it is important that we collect and properly account for all the necessary information relevant to assessing the risk a client is willing and able to take. This will assist in ensuring that suitable investments are selected for the client and which match their risk assessment. For any investment recommendation to be suitable it must: 1. Meet the client s investment objectives. Information gathered on investment objectives should include: 13

14 a) The length of time for which the client wants to hold the investment; b) Client preference for risk taking; c) Purpose of the investment. 2. Be such that the client is able to bear financially any related investment risks consistent with their investment objectives. 3. Be such that the client has the necessary knowledge and experience to understand the risks involved. There will be three key elements to the assessment of a client s understanding of risk i.e. 1. Knowledge and experience of investments; 2. Attitude to risk; 3. Capacity for loss. It is important that the above are not covered in isolation i.e. that we assess each with reference to the others so that we can form a rounded assessment of the client s attitude to and understanding of the risks involved. Where any inconsistencies arise between the assessments these should be discussed with the client. Knowledge and experience A client s knowledge and experience should be clearly documented as part of the fact finding process. Risks should also be clearly explained avoiding the use of jargon. When assessing a client s knowledge and experience of investments we consider these in relation to the products or services being considered. Our assessment of a client s knowledge and experience considers: 1. The types of service, transaction, and products/investments with which the client is familiar. 2. The nature, volume and frequency of the client s transactions and the period over which they have been carried out. 3. The level of education, profession or relevant former profession of the client. When considering a client s knowledge, we take care not to assume that they are aware of all risks associated with a particular product where such risks have not previously materialised. For example, some clients may have seen previous precipice bonds mature without incident, but remained ignorant of the potential losses that could be incurred until their subsequent bonds matured and crystallised a loss. The same is true of people who bought endowment contracts in the 1980s and 1990s. Attitude to risk (ATR) 14 Core to the overall investment process is the need to ensure that the client s attitude to risk is defined and understood by both client and adviser, and that all investment decisions are made with this attitude in mind. Recommending investments which are not designed to meet the client s attitude to risk may not deliver the necessary outcomes to achieve our client's goals.

15 It is imperative that: a) A client understands the types of investment risks they may be exposed to, and that; b) They reach an understanding of how much risk they are prepared to accept in making their own investments (their appetite for risk ). The adviser s role in both these aspects is key and a recommendation cannot be made until a clear understanding is gained. Some clients may have a range of risk attitudes, depending on their objective or the source of funds. For example, whilst one client may simply have an adventurous approach to all investments and pensions, another may be happy to take an adventurous approach to inherited money, but prefer a more cautious approach to the funds they have worked hard to build up within their pension. Consideration of the client s financial awareness should also be taken into account when advising a client. It is especially important to ensure a client with a basic level of financial awareness receives information in such a way that they will be able to adequately understand it. The knowledge and experience assessment will be a key part of this in identifying what previous experience a client has. The client s attitude to risk will be recorded clearly on the client file by using a separate risk profile questionnaire and assessment (see below under Assessment of risk questionnaire). Capacity for loss A key part of assessing attitude to risk is assessing a client s capacity for loss. Capacity for loss refers to the client s ability to absorb falls in the value of their investment. Any loss of capital which could have a materially detrimental effect on the client s standard of living should be taken into account in any recommendation made. It should never be assumed that a client is willing to take the risk of capital loss without discussing with them whether this assumption is correct. On capital loss, there are three main points to consider: 1. The client's ability to absorb falls in the value of their investment and whether the loss of capital would have a materially detrimental effect on the client's standard of living. 2. Whether the client has the knowledge and experience to understand the risks of what is being recommended and whether any risks are clearly explained. 3. The client s attitude to capital loss, which forms part of the assessment of attitude to investment risk. Ability to absorb capital loss Properly documented know your client (KYC) information with specific investment objectives (including timescales), and evidence of adequate emergency funds will help firms evidence a client s ability to absorb capital loss. The key point is to document clearly a client s current financial position (including emergency funds) and future aspirations which are then confirmed properly in the suitability report. Knowledge and Experience A client s knowledge and experience should be clearly documented as part of the KYC process (for more detailed guidance see Knowledge and Experience above under Assessing Client Understanding of Risk). Risks should also be clearly explained avoiding the use of jargon. Attitude to capital loss 15

16 In terms of assessing a client s attitude to capital loss, we have a robust process in place to identify clients that are best suited to placing their money in cash deposits because they are unwilling or unable to accept the risk that comes with investment. A key part of assessing attitude to risk is assessing a client s attitude to capital loss. We do not assume that a client is willing to take the risk of capital loss without discussing with them first whether this assumption is correct. These conversations with the client are documented on file. Assessment of risk questionnaire We assess a client s understanding of risk through the following process. We use a series of psychometric questions designed by Finametrica to establish a client s emotional attitude to risk. This gives us an objective starting point for a conversation about risk. We do not simply accept the output of the risk profiling tool, this is played back to the client to establish if they understand and recognise their attitude. We then show them an illustrative asset allocation, together with a chart showing the historic (36 month) volatility. We also assess the client s financial circumstances (which might take place at a later date), to verify if the potential level of financial loss, which the client has indicated that they are prepared to accept is suitable, given their ability to absorb such a loss. In circumstances where the client is accepting a potential loss which would, in the opinion of the adviser, be too great for them to bear, this should be advised to the client. Equally, a client may be unwilling to accept sufficient risk to realistically meet their investment goals, and this, along with potential solutions, should also form part of the risk conversation. We seek further clarification from the client that the ATR chosen is still appropriate or re-commence the process. The firm retains a record of how many clients fall within each risk definition and how often the definition is changed after client consultation. The selection of Finametrica to provide our attitude to risk profiling tool is governed by the Investment Committee. Due diligence paperwork regarding the appropriateness of the system and how it functions is included in Appendix 4. The ATR definitions which we currently adopt are as follows: Cash Only Unwilling to take any risk of capital loss (other than a potential failure to keep pace with inflation). Defensive A Defensive Investor is looking for an investment where the value of their capital should not fall in the short term and aims to produce returns that are comparable with those from a high street deposit account, but have the potential for some long term growth. They would feel very uncomfortable if their investment rose and fell in value very quickly. Cautious 16

17 A Cautious Investor is looking for an investment which, while giving some potential for real returns, aims to produce returns that are at least as good as those from a high street deposit account. A high level of security of their capital is a priority. Whilst recognising that investment values will change, they would feel uncomfortable if their investments rose and fell in value very rapidly. Balanced A Balanced Investor is looking for a balance of risk and reward, and whilst seeking higher returns than might be obtained from a deposit account, recognises that this brings with it a higher level of risk and that the value of their investment may fluctuate in the short term. They would feel uncomfortable if the overall value of their investments were to fall significantly over a short period and would not be happy to see their capital eroded. Moderately Adventurous A Moderately Adventurous Investor is generally market aware and understands and is willing to accept a higher level of risk in return for the potential for higher returns in the longer term. They recognise that this may result in the value of their portfolio fluctuating, possibly significantly, in the short term. Adventurous An Adventurous Investor is willing to accept a much higher level of risk in return for the potential for higher returns in the longer term. They recognise that this may result in the value of their portfolio fluctuating, possibly significantly, in the short term. They are aware that the risks are such that a significant percentage of the capital sum could be lost. 17

18 Analysis Cashflow Modelling We believe that the production of a Lifetime Cashflow Forecast is fundamental to the construction of a financial plan. By demonstrating to clients how their current financial situation impacts on their future goals, it is possible to understand what action must be taken now to realise those goals. As investment is a long term commitment, it is important that we can put some perspective against a backdrop of negative publicity and uncertainty to ensure our clients remain committed to the right course of action, rather than responding to short term market sentiment. Cashflow modelling allows us to do this in a very visual way. Our preferred method for producing cashflows is by using Truth Software. Product Selection We select the appropriate tax wrapper based on each client s circumstances, which will be different in all cases. We expect all advisers to select the most tax efficient means of investment where relevant to the client's circumstances, for example using a client s ISA allowance each year before other investments. To select the product provider of each tax wrapper we will consider a number of factors, including the service the client requires. Where the client requires an ongoing level of service, including portfolio rebalancing and ongoing maintenance, an investment platform will typically be used. An investment platform gives us the flexibility to rebalance the client s entire portfolio, not just a single product. Where suitable for the client we currently use two investment platforms. These are Ascentric and Seven Investment Management. Selection of these platforms is governed by the Investment Committee and our documented selection process is included as Appendix 5. Research We use a research panel provided by threesixty. They provide product research in the form of either panel or a product matrix, covering the following product types, including a number of RIPs Unit linked Onshore Bond With Profits Bond Offshore Bond Friendly Society Plans Unit Linked Savings Plans Stakeholder Group Stakeholder PPP GPP SIPP (Hybrid) Trustee Investment Plan Income Drawdown (USP) 18 Executive Pension Plan

19 SSAS SIPP (Pure) Third Way (Drawdown & Annuity) Long Term Care (Immediate Payment) PHI/Income Protection Standalone CIC PMI Executive Income Protection Term Assurance Group Life Unit Trusts & OEICS Offshore FCA Recognised Funds Investment Trusts ETFs (physical only) This research is updated quarterly as a minimum, and is based on a comprehensive and fair analysis of the market, so they conform to the requirements of independence. Threesixty maintain records of their research centrally. The methodology used to panel each product is available at Appendix 6. The work undertaken by threesixty is high level research which helps to reduce the universe of potentially suitable products and funds. When making recommendations to clients we will apply our own internal research to ensure that any recommendations made are appropriate for our clients. Internal research The threesixty panels/matrices do not include the following RIPs, although threesixty provide access to specialist research houses for these products: These products are: Enterprise Investment Schemes (EIS) Research is undertaken via Best Invest ( and Venture Capital Trusts (VCTs) Research is via Trust Net ( and Best Invest ( Structured products Research for Structured products is undertaken via the following web sites: and We do not provide advice on non-mainstream pooled investments (NMPI) including unregulated collective investment schemes (UCIS) as they are not generally suitable for ordinary retail investors. Any requests for such products from professional clients or sophisticated/high net worth investors must be referred to the Compliance Oversight for review. We do not provide advice on securities, which do not fall under the definition of Retail Investment Products. The adviser suitably qualified to advise on securities is Angelo Kornecki and Andy McLaughlin and any clients requiring advice in this area must be referred to them. 19

20 The process of advising on EIS/VCTs, investment trusts and structured products is tightly controlled by our compliance and Training & Competence regime. Advisers can refer to these schemes for information on the additional approval requirements. Failure to adhere to these requirements is a serious breach of process. Our Investment Committee has taken a view on the situations where it may be appropriate to advise on each of these product types. The guidelines are below: Enterprise Investment Schemes (EIS ) Enterprise Investment Schemes (EIS) are aimed at the sophisticated investor with large capital gains on which they wish to defer tax and/or an income tax liability that they wish to reduce or eliminate and who wish to include some high risk companies within their overall portfolio. These investments are not suitable for defensive, cautious, balanced or moderately adventurous investors as it is possible to lose all capital invested and the tax reliefs can be clawed back in some circumstances (e.g. if the investor disposes of the shares early or if HMRC withdraw approval). The investor must be in a position to accept the high risks of investing in an EIS and have high level of experience and a strong knowledge on investments and how they work. The adviser should ensure their client has the necessary knowledge and understands the risks involved. The adviser must complete a Sophisticated Investor Form All other lower risk, tax efficient investments should be considered first, i.e. pensions, ISAs and, unless CGT deferral and/or IHT benefits are the drivers behind the investment, a Venture Capital Trust (VCT) should also be considered before an EIS. This type of investment on its own or together with other high risk investments such as Venture Capital Trusts and Structured Products must not constitute more than 10% of the client s portfolio. Investors should: have surplus capital. no requirement for income during the term of the investment and be prepared to invest for the medium to longer term (i.e. 5 years plus); be fully aware that it is possible to lose all capital invested. The investors financial position should therefore be such that any loss or a total loss of capital from this investment would not impact on their standard of living and/or objectives. As such both the investors capacity for loss and tolerance for loss must therefore be high; be aware that the tax reliefs can be withdrawn. VCTs are less risky than EISs as VCTs are a pooled investment (although HMRC-approved EIS funds may be available offering EIS tax reliefs and these will usually invest in a number of qualifying companies). Venture Capital Trusts Venture Capital Trusts (VCTs) are aimed at the sophisticated investor with an income tax liability that will be reduced by the investment and who wishes to include some high risk investments in their overall portfolio. These investments are not suitable for defensive, cautious, balanced or moderately adventurous investors as it is possible to lose all capital invested and the tax reliefs can be clawed back in some circumstances (e.g. if the investor disposes of the shares early or if HMRC withdraw approval). 20 The investor must be in a position to accept the high risks of investing in a VCT and have a high level of experience and a strong knowledge on investments and how they work. The adviser should ensure their

21 client has the necessary knowledge and understands the risks involved. The adviser must complete a Sophisticated Investor Form All other lower risk, tax efficient investments should be considered first, i.e. pensions, ISAs. This type of investment on its own or together with other high risk investments such as Enterprise Investment Schemes and Structured Products must not constitute more than 10% of the client s portfolio. Investors should: have surplus capital; no requirement for income during the term of the investment and be prepared to invest for the medium to longer term (i.e. 5 years plus); be fully aware that it is possible to lose all capital invested The investors financial position should therefore be such that any loss or a total loss of capital from this investment would not impact on their standard of living and/or objectives. As such both the investors capacity for loss and tolerance for loss must therefore be high; be aware that the tax reliefs can be withdrawn. VCTs are less risky than Enterprise Investment Schemes (EISs) as VCTs are a pooled investment structured in a similar way to Investment Trusts (although HMRC-approved EIS funds may be available offering EIS tax reliefs and these will usually invest in a number of qualifying companies). Investment Trusts Due to their design and structure, Investment Trusts are normally regarded as being higher relative risk and more volatile than their equivalent Unit Trust or OEIC counterparts and this should be taken into account when creating investment portfolios for clients. Astute therefore only recommend these products to the sophisticated investor who is in a position to accept the higher risks of investing in an Investment Trust. The adviser should ensure their client has the necessary knowledge and understands the risks involved. The adviser must complete a Sophisticated Investor Form All other lower risk, tax efficient investments should be considered first, i.e. pensions, ISAs. This type of investment must not constitute more than 10% of the client s portfolio. Many Investment Trusts can be purchased within an ISA wrapper or within a SIPP. Where a Customer still has an ISA allowance available it should be utilised before progressing to advise on unwrapped funds. The level of risk applying to each of these products will vary depending on a number of factors including sector and geographical region. It is important that in assessing the suitability and type of fund the following should be considered: the client s income tax status, and whether this is likely to change in the future whether the client is making regular use of their CGT allowance whether the client s ISA allowance has been utilised the client s knowledge and experience of investments the client s attitude to risk as well as capacity for loss and how these relate to their expectations in terms of investment return and a spread of investments across a number of funds and/or sectors whether the client wishes to take an active role in the investment strategy, and would prefer advisory or discretionary management 21

22 the client s investment time horizons and the flexibility of their arrangements, particularly because closed end structures are more suited to holding assets not easily or quickly bought and sold and therefore are better suited to medium to long term investment the client s need for access to capital the client s core objectives i.e. income, capital growth or a combination Structured Products Structured Investment Products should not be considered as standalone products used as a direct replacement for other investments but should instead be a complement to other assets as a satellite investment. Therefore, they should be built into an overall investment strategy in order to manage risk appropriately and provide appropriate diversification. This type of investment on its own or together with other high risk investments such as Venture Capital Trusts and Enterprise Investment Schemes must not constitute more than 10% of the client s portfolio. Given the very wide range and scope of Structured Investment Products, it is clearly essential to assess the potential rewards against the risks when determining their suitability for individual clients. For example, some products may offer a fixed income for a period of time but with the risk of losing some capital whereas others may offer capital security but with lower potential returns. The safer a plan is, the lower the potential rewards tend to be and the reverse also tends to be true. It is important to remember that an investor might get more by investing directly in the stockmarket, if it is a rising market, although naturally they would not get any protection from any falls. FCA guidance published in 2009 highlighted that investors may not be aware of their exposure to a single counterparty. Their guidance expects advisers to consider suitability more closely in the event that an investor has more than 25% invested in structured products or more than 10% invested in a single product or exposed to a single counterparty. These are not fixed limits and the guidance only recommends proper due diligence for advisers in recommending appropriate investment limits for their clients. Following the Lehman s collapse and the changed market conditions, there is now a heightened awareness of the potential for investment grade counterparties to fail. The FCA expects firms to subject Structured Investment Products to a higher degree of due diligence. This due diligence must cover the points detailed in the Structured Product Fact Sheet contained in Annex 16. As well as considering the client s finances, attitude to risk, objectives and general personal circumstances, the factors the FCA expect to be assessed for structured products include: The client s knowledge and experience of investments. The client s core objectives i.e. income, capital growth or a combination The client s timescale for investments and the flexibility of their arrangements. Whether the client has sufficient emergency funds. Whether the client has a potential need for liquid capital during the investment period, and if so, capital should be set aside. If the investment is designed to provide a set return on a set date to meet a future need for money but the contract has the potential to mature early ( Kick Out ), what this may mean for re-planning, re-investment, and, hence potential additional expense for the client. Whether the client has any existing liabilities that may best be repaid before considering the investment. The implications of recommending a fixed-term product that cannot normally be cashed in according to market sentiment. 22

23 Whether the product is appropriate for the client s attitude to risk as well as capacity for loss and how these relate to their expectations in terms of investment return and a spread of investments across a number of funds and/or sectors Whether the product recommended provides/maintains an appropriate level of diversification within the client s portfolio and does not concentrate assets in a single product or product type. The client s tax situation (for example, income tax, capital gains tax, and where applicable, age allowance, personal allowance and married couples allowance) and whether this is likely to change in the future. Whether the client s ISA allowance has been used and whether the client is making regular use of their Annual Exempt Allowance for CGT purposes. For further details and guidance on all of these products including the risk warnings which must be included in the suitability letters for the products, please refer to our separate factsheets in Appendix 14. Asset Allocation Our investment philosophy is based on strategic asset allocation. To produce the asset allocation models we undertake the following process: We currently obtain the asset allocations used by Seven Investment Management, Brewin Dolphin, Three Sixty, Vanguard s Life Strategy Funds, Quilter Cheviot and the IMA Mixed Asset Sector etc. These companies represent the largest proportion of investments held by our clients and companies whose products Astute envisage using most frequently in the future. The results of these findings are compiled on a spreadsheet. From this the Investment Committee decide on an appropriate consensus opinion to ensure that Astute s asset allocation model is broadly in line with the companies we more commonly use. The spreadsheet detailing the current asset allocation models is provided in Appendix 7 and saved in folder Compliance/ Investment Process. Records of previous models are kept at in the relevant earlier Compliance folder. Investment Solution Whilst we consider each client's circumstances in their own right, we do have some guidelines around which investment solution we expect advisers to use. We have highlighted these already under Client Segmentation, above. Governance over these Investment Solutions is the responsibility of the Investment Committee. The following are those solutions which have been approved and whilst we encourage advisers to identify circumstances where these might not be appropriate, reference should be made to the compliance and Training & Competence schemes for information on what to do in those circumstances. Discretionary Fund Management Service 23 Introducing business to a Discretionary Fund Manager (DFM) should typically be considered for clients with upwards of 150,000 of investable assets. Wealthy clients value this type of service because of the face to face contact that is a key element of the DFM s proposition. We believe it is not possible for a DFM to offer a truly bespoke solution for sums lower than 150, 000 and do not see the value in paying a premium charge for a commoditised service.

24 The Selected DFM will provide a tailored service, targeting the client s goals and accommodates specific requirements around legacy assets. The combination of discretionary permissions and deeper research resources mean that they can provide clients with the opportunity to access a more actively managed service with a broader universe of investment types. This is more important with significant amounts of wealth to be invested. The ability of a DFM firm is largely dependent upon their reliability; both as a business partner and in producing investment returns. It is important to partner with a strong DFM that understands their role is to provide the tailored investment solution within the overall financial plans we have created for our client. As we are introducing our client to an investment specialist, it is essential to know that they have a robust and repeatable investment process backed by substantial research and risk management capabilities. Whilst discretionary management is a tailored service, this does not mean views on the best funds and asset classes should vary from client to client. The DFM should apply its house views consistently. Tailoring should reflect different client requirements in terms of risk, return requirements, investment time horizon and any legacy/cgt constraints the client may specify. Past performance is not available as a measure for discretionary services as the makeup of each portfolio is different. Therefore, in selecting our panel we measure DFMs against a number of predictive criteria. It is very important that the discretionary managers we use are aligned to our overall multi-asset investment philosophy and other investment approaches. In selecting our recommended discretionary managers we have identified the following key criteria: i. A proven willingness and ability to work within defined mandates ii. iii. iv. Proven experience in constructing and actively managing multi asset portfolios Proven ability to understand and use a very broad investment universe Proven ability to exploit alternative asset classes and advanced investment techniques where appropriate v. Can demonstrate a deep understanding of investment risk (stock, sector, market, manager, counterparty etc.) vi. vii. Has a credible, clearly defined and repeatable investment process Does not have excessive reliance on one or two key individuals viii. Has a clear and transparent pricing strategy with estimated TERs in a range of % (including trail and underlying fund fees, where used) ix. Accessibility of qualified fund managers (rather than relationship managers) both to clients and the investment committee x. Production of full investment reports including CGT reporting xi. xii. Security of manager and custodianship arrangements Financial strength/stability of firm and the potential for instability relating to corporate actions To select the Preferred DFM we issued the DFM request for information letter contained in Appendix 8. and gathered the DFM Due Diligence shown in Appendix 9. Further responses and notes relating to this are stored electronically in the Investment Committee folder. The investment performance of The Preferred DFM is monitored via each client review and we undertake a full strategic review annually. The last strategic review took place February