What on earth is that?! How to deal with the unexpected in client portfolios

It is traditional when calling in a repairman that at some point during the transaction they will turn to you from beneath the bonnet of your car or from behind your boiler and ask with a wry and long-suffering smile ‘what fool did this last time?’

As with household appliances, so with portfolios.

So how does one identify, remove and most importantly keep the client informed about the junk which is sometimes inherited with portfolios?

One positive to be drawn from the recent market falls is that it does perhaps provide an opportunity to clean out legacy holdings without incurring capital gains charges.

The problem is nonetheless a tricky one. Marcus Johnson, of Cambridge-based wealth manager NW, Brown believes part of the challenge is that the holdings have often been chosen by the client themselves with great enthusiasm. It creates a tricky relational issue to overcome. For Johnson, the solution could well be to tell new clients that if they are unwilling to let go of nasties, he may be forced to let go of them.

He says: ‘You often come across some foreign stocks and penny stocks and more rarely boiler-room schemes that it can be a real struggle to get rid of. But by far the worst is when a client has been lumbered with an awful investment bond or pension policy just because they happened to sit next to the wrong person at dinner.

‘The life company has told them that they have X number of units worth this notional amount, but of course that is different from the surrender price. When they have been told it is worth £1 million and you have to tell them it is actually £750,000 it can make for an uncomfortable conversation.’

He added that tearing a portfolio down and starting from the ground up was unlikely to be the best solution but cutting out all small and illiquid stocks produced a coherent base to build from. Honesty from the start about how inherited issues could cause drag as they were whittled down is also advisable.

NW Brown is currently creating an internal ‘bad bank’ which would buy a client’s worst stocks at a nominal price to at least add liquidity to begin to re-orientate a portfolio.

Managers dealing with more pressing problems, such as short-dated structured products which have seen liquidity drop out of the market, were unlikely to have the luxury of time, however.