You may not be aware that while there are a lot of financial products a financial planner could sell you there are only a limited number they can sell you.

Take a big wealth management business such as AMP (I could use many other examples). The AMP is Australia’s largest non-bank-owned wealth management business. It has a number of large “dealer groups” operating under the brands of Hillross, Charter, Genesys, ipac, Jigsaw, SMSF Advice, Quadrant as well as the more recognisable brand of AMP Financial Planning.

A big part of the AMP business is to attract financial planners to operate in partnership with them in these dealer groups selling their products and servicing their customers. Of course one of the main concerns in this structure is that the people the dealer groups licence respect and protect their brand.

One way they achieve that is to vet or research financial products and tell their licensees which products they approve of and by omission which products they don’t. It’s called an “approved list” of products and all dealers groups and most financial planners have them, a list of financial products their licence holder has approved for sale to you.

Ask your financial planner for insurance, for instance, and you might find that they can only recommend one of six options because those are the only ones on the approved list.

Most planners stick to the approved list: it’s easier and it’s safer because as licensed advisers they have to have a reasonable basis for their recommendations and if they stick to the approved list they have that covered. It’s also better for the client because the product has passed the sniff test.

You can still buy non-approved products but generally your adviser will have to get the dealer group’s permission by proving why this non-approved product is suitable to your individual financial circumstances. You can see why it’s easier just to stick to the list.

Planners who are not aligned to a large dealer group have the same issue. They also need a reasonable basis for their recommendation, so they use third party independent research firms such as Lonsec, Zenith, Morningstar, Mercer or, one of the best known until it went bust, Van Eyk.

There is a huge industry out there researching and approving products so licensed advisers don’t go off the straight and narrow.

Some large wealth managers do it in-house, others contract it out, some do both.

Now imagine what this means for a funds management firm. The stark reality is that unless you are on the approved lists of these large wealth management dealer groups you are pushing water uphill. You may think your job is to pick stocks and make your customers money but actually it’s not.

Your main focus in the early years is to get approved and that means having enough money to bankroll your funds management business for a few years without approval, performing well enough to attract approval, developing a critical mass of money in your fund to warrant approval and then, having done the hard yards and got a foot in the door, being able to jump through all the rest of the hoops which includes presenting a “proof of process”.

The net result is that the approval process is about having a reasonable basis to recommend a product so no one gets sued for recommending it. This is all a bit of a perversion of what it takes to be a good fund manager, because getting approved is about being a safe fund manager whereas getting performance is about being a good fund manager and that, as any fund manager will tell you, is something more ethereal because performing well is not a robotic process. If it was something a automaton could do, then anyone could do it and if it was, then some fund manager would be doing it the Warren Buffett way, we would all be invested and we would all be billionaires.

But no one is and no one can because performance is not a formula. You cannot write it down, it is an art built on experience and knowledge and there is something delicate about it.

That’s why the Perpetual Funds Management share price fell over when John Sevior left, that’s why Kerr Neilson is worth more than $2 billion, that’s why Warren Buffet can’t be copied, because they are simply good at it and it takes humans not formulas. There’s no algorithm for “I just know what to do and when” but you won’t get approved without it.

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Posted by Marcus Padley – The Age on 18th November, 2014