When we think about something that is “bespoke”, we think of something luxurious, exclusive, tailored to our exact needs, in a special and unique way. The person or institution, will do everything they can to make you feel that, by buying into their offering, you are entering an exclusive and elite club, thus you expect to pay more.
This thinking works for many things, like clothes and interior design, but does it work for financial management?
When it comes to tailoring clothing, for example, everyone likes different colours and patterns. We are all different shapes and sizes. Then there is the material, the feel and thickness, not to mention the cut. If you have very specific tastes, getting exactly what you want can often only be achieved with the bespoke service offered by a tailor. Indeed, they might tell you that anything else might not be what it ‘seams’!
When you give your savings to a money manager, there are two main priorities:
- The expected / objective return
- The level of accepted risk / volatility
This is where an “asset manager” (such as a fund manager / stockbroker) and a “financial consultant” might differ, since the latter must clearly consider a great deal more, such as income planning, inheritance and taxation. Here, however, I am just considering management. We invest money to get a good return and hope it can be done with an acceptable level of volatility.
You might get a nice glossy brochure, be received in extravagant and impressive offices, however, neither of these actually aid in achieving the objective.
In conclusion, essentially everyone wants the best return with the least volatility.
You Cannot Give the Best Possible Portfolio to Everyone
The moment a money manager offers you, what they want you to believe is the best and bespoke portfolio, how do they then offer the same to someone else and call it bespoke? Surely now it is just an exact copy, a duplicate … ‘off the peg!’ They either need to change it so it is not quite as good, or break the promise to you, the client, that what they are offering you is somehow unique.
Of course, you need to consider the two main questions above, however, this is even simpler than these two points. This is because they are interconnected i.e. the level of risk tends to be connected to the return.
If we think of fishing (sorry, I cannot find a fit for tailoring), someone going out to the deep ocean in a boat might expect to catch significantly more fish than someone with a fishing rod sitting on the dock. Clearly going out into the ocean carries greater risk, however, you expect a better reward with that risk, which is why people do it.
Going back to investment, the fact that risk and reward are interconnected means that money managers can serve everyone by having several profiles matching the desired different levels of risk and reward. This, in reality, is what financial institutions do; they have several, managed portfolios, designed to fit every risk / reward profile. They then ask you questions to understand which portfolio suits you best and then make the recommendation; which many then offer as “bespoke”.
It sounds like I am being critical of this strategy, however, this is very far from the truth. Using a range of portfolios makes a huge deal of sense, for both the advising institution and the investor as it “should” keep costs to an absolute minimum, match exactly, the investors risk / reward profile, whilst ensuring the very best in quality management possible (significant investment is made by managers to ensure the quality of these, often very sizable, portfolios).
What we do not support is to promote it as in any way as “bespoke”, which would be ‘materially’ incorrect!
Calling it bespoke, however, allows financial institutions to keep their costs low and input to a minimum, whilst charging the investor as much as possible, maximising profits for themselves. Rightly, this approach should mean low costs and maximised returns for the investor.
Why not charge more, it is bespoke after all! Do you think the marble floors, chandeliers and that chocolate sprinkled mocha they served you pay for themselves?
Is your investment objective to be placed in a pampered environment or earn a decent return on your savings?
The best is to follow the logic of what is best for your money, so for you and your family, by avoiding this common bespoke stitch up!
This article was first published in the Connexion September 2021