Sample CIP

Building clients’ trust through Investment Philosophy and Process

In a world of ever-increasing complexity, clients can take comfort from knowing that their investments are under the stewardship of professional advisers and managers.

This blog gives some ideas of the content for an adviser Investment Philosophy and Process document that can be used with customers to show how you look after their money. We hope the content and structure is a helpful starting point.

Here is a short example of the wording you may use in your Investment Philosophy and Process document. Please ensure you compliance approve in the usual way before use*:

How we look after your money

Investing your money can be daunting, with so many options available and so many uncertainties, how do you choose what is right for you? As your adviser, we can eliminate some uncertainty and work with you to identify the most appropriate way for you to achieve your financial goals.

Our Investment Process creates a framework for us to discuss your needs and expectations, to assess and agree your attitude to risk and then to build and manage an investment portfolio to match. The beliefs below are an important foundation upon which we aim to build long-term relationships with you, our investors.

When you have worked hard to accumulate the money you are about to invest, it is important that you read and understand this document as it will aid discussions we have at the outset.

Our philosophy – what we believe

Our Investment Philosophy details the foundations and beliefs that underpin our investment approach. It is based on tried and tested principles that help us to deliver good outcomes.

1. Saving vs Investing
Saving for a rainy day is great but if you want your money to work harder for you longer term, then investing in company shares, government bonds or commercial property may be the answer. Your money committed for a longer time will have higher return potential. If time is short or you are unable to tolerate the risks, then cash may be your only option.

2. Set your goals
All investors should set goals. We can help with goal setting by using a simple cash flow tool that illustrates future needs and projected savings. From there you can calculate how much you need to save and invest to achieve your goals.

3. Risk and return, but no guarantees
There is good risk and bad risk and higher exposure to the right risk factors leads to higher expected return. Risk is the premium investors pay for the expectation of a greater return.

4. Time. And timing
The corrosive impact of inflation means that, by standing still and playing it safe in absolute terms (i.e. holding only cash) you will be going backwards in real terms (after inflation). Long-term investment in more risky assets is therefore compelling for investors with a long-term goal.

This table shows real annual returns over different time periods for different UK assets (after inflation), (% per year).

5. Asset allocation
Academics will continue to argue about the precise amount of value that comes from strategic asset allocation (quantity in equities or bonds or property) rather than stock selection (which equities etc.), investment style or market timing. With asset allocation having the biggest influence over the variance in portfolio returns, we will focus our efforts there when building your portfolio.

6. Diversification – spreading investment risk
The investment portfolios we recommend hold the shares and bonds of many companies and governments in many countries globally. We will also invest in a range of fund management firms and products. Reducing the risk of having all your eggs in one basket.

The table below shows the best and worst individual markets over the last 15 years. The patchwork dispersion of colours shows no predictable pattern and helps illustrate why we believe it is pointless to try to predict which country (and which company in each market) will be at the top next year or the year after. A simple diversified portfolio is much less volatile – represented by the white box.

7. Costs eat returns
Over long time periods, high management fees and related expenses can affect wealth creation. Fund manager charges can impact substantially on fund returns, especially in flatter markets. For this reason, we prefer “low cost” or “passive funds” for at least some part of our portfolios.

8. Tax efficiency and access are important
We may use new technology platforms, known as wraps or fund supermarkets, to hold your investments. These offer safety and access to your valuations and tax wrappers (pensions and ISAs for example). Money can be moved between funds cost effectively if we need to in future.

9. Active or index
Research shows that:
• Active fund managers make decisions about holding one investment over another. The average active fund will do worse than the market because active funds are paying the highest fees, but some active managers may have the ability to add value over time;

• Index funds are willing to accept the market rate of return with smaller fees than active funds. In the longer term, the average index fund will perform better than the average active fund because their fees are lower.
We believe is it best to blend active and passive funds to reduce costs yet still have the potential to add value, or to use a manager that actively manages a range of passive funds.

10. Humans are poor investors!
Left to our own devices we tend to buy shares after the market has gone up and then sell them after they have fallen. This, of course, is the wrong way around. Studies have shown that this so-called “behavioural bias” may cost the unwary investor around 2% a year in returns. Our long-term approach to investing will help you avoid this, and other common errors.

*Disclaimer: This example wording has not been verified by TCF Investment and whilst we think it may be of interest to you, any use of it is entirely at your own risk and you need to ensure it is checked appropriately to your own satisfaction.

A more detailed ‘Sample Investment Philosophy & Process’ template can be downloaded from our Adviser Centre