Article last updated 5 September 2023.
Clarify objectives
First, think about what you are trying to achieve for your client. Are you looking to meet ongoing care needs, grow the award to meet future needs or, more usually, a combination of the two? Then, consider the length of time the client can stay invested, their capacity for risk and any ethical restrictions.
Time horizon
How long an investment can be held plays a fundamental role in defining an investment strategy. Generally speaking, volatility is smoothed over time, so the longer a client is invested, the more the portfolio is protected from short-term ups and downs. For clients who have sustained catastrophic injuries, the time horizon can be unclear, but we suggest the minimum length of time to invest in equity markets is five years. Most investment managers (including Rathbones) will be reluctant to manage portfolios for a shorter period.
Capacity for risk
An investment manager should help you establish the most appropriate level of investment risk for your client. There are a number of variables to consider, including appetite for risk (how much you are willing to take) and capacity for loss (how much the client can withstand). Though no investment is risk-free, having a well-balanced, diversified portfolio reduces ‘specific risk’ – that is the risk of loss from a single investment or asset class. Not all investments will move together – inevitably, some will go down as others go up. Capacity for loss is linked to risk because the less a client can afford to lose, the less risk you should take. This is particularly pertinent for clients who have received an award of damages, as the funds need to last for their lifetime and cannot be replaced.
Ethical restrictions
As deputy, you may wish to place exclusions or restrictions on an investment mandate to reflect the client’s past feelings and wishes. Ethical investing typically requires the application of a negative or positive investment screen, or both. A negative screen rules out any companies involved in specific activities. A positive screen selects companies with strong environmental, social and governance (ESG) policies. Every investment manager has different ethical investing methodologies, so it’s important to find a firm that meets your requirements, has relevant ethical experience and a strong performance track record. Rathbones’ objective is to become the leading investment manager in this area. We will cover our ESG approach to investing in future editions.
How to evaluate investment managers
Once you have defined the objectives above, you may wish to consider the following criteria to choose a suitable investment manager:
The firm and the team – The relationship between deputy and investment manager is a long-term commitment so it’s important to ensure you have a shared approach to looking after your clients. The better the investment team knows you and your client, the more likely they are to fulfil your requirements. The experience of the manager, their wider support team and the investment research team is important too. You should review the biographies of the primary members of the team before you decide to invest.
Existing number of PI/COP clients – A larger number of COP clients is indicative of greater depth of experience in this sector.
Location – It’s important to meet regularly to review the investments so be aware of how feasible it is to meet face-to-face with the necessary frequency.
Assets under management (AUM) – It’s up to you to decide your preferred size of manager, usually judged by AUM – of the firm in total and of the PI/COP team. However, be aware that larger investment managers will typically have a dedicated COP investment team who are experts at managing PI awards and should understand your clients’ needs better than generalist investment managers. They are also more likely to have greater purchasing power, which should benefit the client long-term.
Investment methodology – Philosophies, styles and processes will vary according to the manager, and you may have specific preferences. One important factor to consider is the volatility of the portfolio, and what the maximum drawdown has been during periods of market stress. For PI/COP clients who are not ordinary investors, it is generally better to target a steady return rather than face volatile markets.
Liquidity – This is a measure of how quickly investments can be sold for cash. It’s important to specify any liquidity restrictions at the outset. Typically, the investment manager should be able to sell the majority of portfolio assets in fewer than 10 days, but there may be a small proportion which could take longer. It’s important to ensure your client holds enough funds in cash, so you don’t need to withdraw from the portfolio at inopportune times.
Performance – Past performance is not indicative of future performance, but it can point to the effectiveness of a firm’s processes and decision-making, so you should request a performance record over three, five and 10 years. This can be evaluated in absolute terms (did the strategy deliver gains or losses and how much) and/or compared to market performance, the firm’s peers and benchmarks, and perhaps your own benchmark. It is important to check whether performance is gross or net of fees, including VAT (where relevant).
Reporting – You should expect to be in regular contact with the investment manager, who may also communicate the firm’s investment views. You should receive a comprehensive portfolio valuation at least once a quarter. Consider whether digital reporting is important to you.
Fees – Typically, the higher the value of a portfolio, the lower the management fee as a percentage of portfolio value, and vice versa. It’s important to have a clear understanding of the total fee your client will pay, and whether the investment manager applies a cap, as this can make a big difference to net returns. This is called the ongoing charges figure (OCF), which includes an annual management charge (AMC), VAT, where relevant, and potentially other costs, such as fees for outperformance, exit fees, cost of third-party funds, custody and transaction costs.
Additional services – Some investment managers provide extra services for PI/COP clients such as checking the accuracy of periodical payments.
Regulation – The UK financial services industry is regulated by two separate entities: the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). To check the legitimacy of a financial institution or report an issue, the FCA is the place to start.
Summary – our top tips for selecting an investment manager
Chose an investment manager who:
1. you like and trust;
2. is experienced in working with PI and COP clients;
3. offers a financial planning service;
4. provides lifetime cashflow planning;
5. provides detailed past performance figures;
6. incorporates ethical preferences;
7. has transparent and competitive fees.
For further information view Rathbones’ specialist personal injury and Court of Protection services.
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