An adviser writes… the case for custom indexing
Photo: Edu Grande
From religious beliefs to personal loss, clients can have powerful reasons behind their investment preferences, even down to excluding specific companies. This adviser’s experience shows why the industry’s ‘we know best’ approach is outdated – and how Fundment’s custom indexing puts control back where it belongs.
“We have been offering custom indexing as an option to some of our clients for a year now,” writes Matt Pitcher, Managing Partner at Altor Wealth Management. “Custom indexing allows us to tailor a portfolio to an individual’s needs and preferences, right down to the exclusion of specific companies.
The power of custom indexing is that you can exclude controversial sectors such as tobacco or fossil fuels, industries, countries, tilt towards shares with certain characteristics (such as income-producing) or just exclude individual companies.
What has been interesting from the conversations we are having with clients is the sheer variety of what they are interested in when it comes to the companies they are willing to entrust their hard-earned money to.
Three ways custom indexing empowers our clients
Firstly, there have been the clients who previously would not have described themselves as ‘ethical’ but, given the full list of controversial sectors (Adult Entertainment, Alcohol, Controversial Weapons, Defense, Firearms, Fossil Fuels, Gambling, GMO (Genetically Modified Organisms), Nuclear, Pork, Stem Cells, Thermal Coal, Tobacco), find a sector that they object to.
We have had ‘non-ethical’ clients exclude gambling because someone in their family had this addiction, and tobacco because they lost a friend to lung cancer. The term ‘ethical’ is helpful to some investors and they can exclude all of the above but, for some people, it is unhelpful and they just need the option to surgically remove a single sector that they have a personal, negative experience of.
Secondly there are those who wish to exclude companies listed in certain countries, or individual stocks such as Tesla, generally for political reasons (Tesla is the most excluded company by our clients).
Thirdly are those clients who have a religious belief or lifestyle choice which leads them to exclude sectors such as pork or stem cells.
There are of course lots of other reasons for exclusions such as excluding the shares of your employer if you already hold these elsewhere (such as in stock options or a share save scheme).
Custom indexing makes it the client’s choice
Most investment managers cannot deliver this level of ‘bespoking’ and make a profit and so claim that the end client shouldn’t be allowed to ‘skew’ the portfolio.
By contrast we believe that it is the client’s capital to invest as they see fit. Too often the investment management industry has had the arrogance to claim ‘we know best’ and the client should take what we give them.
However, why should any individual make choices with the goods and services they buy that align their spending with their values, but get no choice when it comes to the money they save and invest? What is the point in avoiding buying the products of a company you detest if you are then herded into giving them your pension savings to invest in their same business?
Medical science is progressing towards a world of ‘personalised medicine’ where the drugs we are prescribed are tailored to our genetic make-up. This is much harder to achieve than tailoring a portfolio to the individual and yet widespread personalised medicine might arrive before widespread personalised investing at this rate!
We see some good practice amongst financial advisers and investment managers but the incentives are mostly misaligned with the client’s wishes. It is much more profitable for a firm to offer five risk-graded portfolios from which a client has to pick, than to build as many different portfolios as you have clients.
In a world of developing technology though, it is possible and it is available now.”
Matt Pitcher is Managing Partner at Altor Wealth Management, and this article first appeared on Altor’s website HERE.
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