BlackRock's Tony Stenning takes a look at how multi-asset solutions can help advisers coax their clients away from the perceived safety of cash.
Convincing clients to leave the perceived ‘safety’ of cash and reinvest in ‘riskier’ assets, such as equities and corporate bonds, is not an easy task. However, it is essential for long-term wealth creation.
BlackRock’s most recent Investor Horizons survey confirmed cash is currently the asset class of choice among UK investors (77%).
Seen as ‘safe’ and ‘low-risk’, many clients are holding their assets in cash accounts despite low interest rates and ever-present inflation diminishing the purchasing power of their money.
Time to cash out
At the same time, less than one in five investors are willing to take on higher risks in order to achieve higher returns. With only 13% of investors actively making changes to their portfolio, advisers are facing a challenging task when recommending changes to their clients’ investments.
A broader view
This is where multi-asset funds can help. There are currently more than 200 multi-asset funds on offer to UK investors, all promising to be the best for different reasons. Given these funds invest across numerous asset classes and are categorised across eight IMA sectors, it is not easy to compare like with like.
However, depending on a client’s individual circumstances, a good starting point may be to determine whether investment objectives in each particular case are better served by actively-managed or index funds, or by a combination of the two.
If cost is a key factor for your clients, looking to a portfolio that invests largely in index funds might be more appropriate. Apart from factors such as performance and track record, it is also worth paying attention to what a fund is trying to achieve.
Increasingly, clients are looking for greater certainty regarding potential outcomes, be they income generation, protection against inflation or targeting a certain level of investment risk.
Some multi-asset funds are also risk-targeted investment solutions, which can provide the basis for a core allocation within a client’s portfolio by being more aligned to their risk tolerance.
The provision of cost effective risk-targeted funds is a growing area of the retail investment market in the UK. Investors are increasingly recognising the benefits of combining the cost efficiency of index funds or exchange traded funds (ETFs) with an asset allocation overlay in order to achieve their required outcome.
Designed to generate returns within pre-defined volatility bands, risk-targeted funds may provide clients with greater understanding of potential returns. Once an adviser has reviewed a client’s financial circumstances and identified his or her risk profile, a suitable risk-targeted fund could be used as a core building block of an overall portfolio to match that client’s attitude to risk.
This approach can allow an adviser to tailor solutions to their client’s investment objectives based upon their individual circumstances and tastes. Even in cases where the investment objectives of two different clients seem very similar on the surface, an adviser can offer them ‘bespoke/off-the-shelf’ solutions by combining a risk-targeted fund with other different investment options.
Helping clients understand their risk tolerances and delivering greater clarity around potential returns may just help them become investors again. Given its focus on pre-defined levels of investment risk, a risk-targeted multi-asset portfolio could help clients take those initial tentative steps out of cash.
Most people, deep down, realise that relying on a cash savings account to fund their retirement and other long-term financial goals is not really meeting their requirements. For those looking for a simple but diversified portfolio, one that aims for returns within pre-defined risk targets may provide the answer.
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