How Advisers in Europe Manage Investment Propositions

Every year, Dimensional offers advisers the option to participate in our Global Advisor Study. In 2023, 178 firms across Europe participated. The data sheds light on current themes and allows us to identify best practices among successful firms.

In How Firms Win in the Margins, we presented business strategy insights from the study. Here, we present and interpret data from the study’s investment module.

First, most high-performing advisers (95%) use model portfolios, such as a default 60/40 portfolio, with 72% offering ESG portfolios as well.¹ Advisers cite consistency in investment experience across clients as a key benefit. They also highlight scalability, with more time available for client interactions and financial planning.

Recent research done in collaboration between Marco di Maggio, Associate Professor of Business Administration at Harvard Business School, and Dimensional, showed that “a greater number of model portfolios, and the use of small-account solutions are associated with stronger growth” of adviser businesses over a multi-year time-period.²

Second, most firms emphasise the importance of client communications. In particular, the vast majority (91%) of high-performing firms state that everyone working with clients directly can articulate their investment philosophy. Clear communication around goals and expectations is often critical to a successful investment experience. For this reason, communication is one of the components of Dimensional 360, our holistic client experience offering.

Third, looking more broadly at all firms, close to half (47%) of advisers use investment policy statements. Such statements might contain an overview of investment policy, educational materials surrounding drivers of returns and volatility, information about how portfolios are constructed and funds are selected.

In the UK, the new Consumer Duty for advisers requires consumers receive “timely and clear information [they] can understand,” and “products and services that are right” for them.³ An investment policy statement can help an adviser set a standard of service.

Finally, two thirds (66%) of advisers mention having an ESG offering, with the primary goal of helping certain clients align their portfolio with their values.

In our view, the growing number of ESG strategies can present opportunities for certain investors. However, it can also lead to confusion, with vague promises and unclear trade-offs. We recently published “12 Principles of Sustainable Investing” to help advisers cut through the noise with their clients.

The vast majority (87%) of advisers view fees as one of the most important criteria when selecting funds for model portfolios. For a given strategy, lower fees often mean higher returns for investors and expensive funds tend to underperform, as we highlight in one of the takeaways of our annual Fund Landscape study.

Of course, costs can go beyond fees, and Dimensional believes investors can do better than indexing by considering the total cost of ownership. This is why Dimensional strives to add value for investors beyond traditional index-based approaches while maintaining competitive fees. Between 2013 and 2022, the average ongoing charge figure on our UK- and Irish-domiciled funds has gone down by 33%—and for some funds by as much as 50%.⁴ Most of our funds place within the cheapest quintile of active funds in their Morningstar category.

Beyond fees, exposure to premiums is a priority for more than two thirds (70%) of advisers. In a recent paper, we discuss how targeting premiums within equities can improve retirement outcomes, specifically in the form of lower failure rates and larger bequests than with a simple passive exposure. As we show in another research piece, giving equal consideration to the size, value and profitability premiums might be a good idea, since their expected returns are indistinguishable.

The portfolios submitted by study participants allow us to observe their exposure to these premiums, plotted in Exhibit 1 below. In the left-hand chart, we observe that most advisers in the study have equity portfolios with a lower average market capitalisation and price-to-book than the market. In the right-hand chart, we observe that portfolios with a deeper exposure to value tend to have lower profitability characteristics. This is to be expected: profitable companies tend to be more expensive than less profitable companies.

However, for portfolios with similar value exposure, the portfolio with a higher exposure to the profitability premium should have higher expected returns; conversely, for a given profitability exposure, tilting towards cheaper companies should lead to higher expected returns. We discuss these points in a dedicated article. Our Model Centre can also help clients build different combinations of Dimensional strategies to understand trade-offs and achieve the right balance.

What about fixed income? Advisers in the study employ fixed income strategies primarily for volatility reduction (86%) and capital preservation (54%). In a recent article, we show that an approach that varies the composition of a fixed income allocation depending on the overall goal of the portfolio may help investors better achieve their goals.

Finally, the study shows that portfolios currently have low average duration. Nearly half (49%) of portfolios have a duration between zero and three years, and one fifth (19%) between three and five years.

The current short duration of adviser allocations might reflect their use of Dimensional fixed income funds. Under our  approach, we will position ourselves where expected returns are the highest within the constraints of each strategy. In an inverted yield-curve environment, expected returns are generally highest at shorter maturities. As yield curves change, our portfolios might take more duration. This dynamic approach contrasts with an indexed approach, which typically does not consider the expected return of bonds when selecting them.

Overall, the 2023 Global Adviser Study suggests that many participants are implementing what Dimensional believes is a sound way of managing investments—focusing on expected returns, considering risks and costs, and emphasizing due diligence and clear client communications. While uncertainty is part of the investing journey, the study shows that many advisers are tilting the odds in favour of their clients.