There are a number of ways to construct a portfolio but, as North's John Husselbee finds out, the temptation to opt for the same asset allocation as everyone else is all-too great.
In a post-Retail Distribution Review (RDR) world, independent financial advice is increasingly being repackaged to incorporate a range of wealth management solutions.
Many advisers believe their core competency and, indeed, their added value, is giving financial advice to their clients rather than constructing and monitoring investment portfolios; an activity which, to them, can be onerous in terms of time and resource.
No wonder there has been a growth in the outsourcing of investment management to discretionary fund managers.
Investing by numbers: how to avoid following the herd
In terms of investment solutions, we see that once an advisory firm has segmented its clients and taken into consideration the new regulatory environment, there are four investment options: first, advisory portfolios where advisers buy into strategic asset allocation and fund research, often available via a suitable platform; second, managed fund solutions which will frequently be actively managed and may follow either a multi-manager or multi-asset approach; and two other options, which fall into the category of discretionary managed portfolios – either on a model or bespoke basis.
For each of these outsourced investment solutions, there is a range of investment objectives, from capital preservation to capital growth. Whichever objective is recommended by the adviser, it will be as a result of an assessment of risk, usually via a risk tolerance questionnaire.
What is important in this process is that the recommended investment solution remains – from initial investment and through duration – aligned to the client’s risk appetite.
Hence, the recent proliferation of risk graded managed funds and discretionary managed portfolios. These are easily identified as they typically - although not always - carry a number rather than a name.
This market is being established in a post-RDR environment and so there are very few discretionary fund managers who can boast a five-year track record. In seeking to achieve a risk rating from a third party, some providers have reverse-engineered existing investment products and services.
However, advisers recommending this route should be aware that risk ratings have proven inconsistent over time. The investment manager, historically, may have been more focused upon return, which would have led to a variable outcome in risk metrics. If this is the case, in choosing one of these funds, the adviser will, in the future, consistently need to review for client suitability.
Finally, there is another consideration for the adviser when seeking an appropriate investment solution. Some non-investment management companies offer risk-graded strategic asset allocation models. These provide a wide range of outcomes and are usually linked to risk tolerance questionnaires.
The temptation to adopt the given strategic asset allocation model is best avoided if outsourcing to a discretionary fund manager. For, in doing so, you allow your investment manager full use of all the tools to construct and manage a risk graded fund or portfolio by mapping out the range of outcomes.
For any given outcome, there are a number of ways to construct a portfolio. It would be a mistake to herd all investment managers into the same strategic asset allocation.
>> Find out more
For more on this subject click here
Alzheimer’s is the most common cause of dementia
Total of 72 accredited firms
23% fall since Q1
Achievements, charity work and other happy snippets
Including advice firm Chadkirk WM