Tony Stenning, head of UK retail business at BlackRock, on the rise of risk-rated fund of funds investing in index strategies or ETFs...
With the Retail Distribution Review (RDR) framework now in place, consumers will become increasingly aware of the costs and charges for financial advice. For advisers, the ‘unbundling’ of fees will also bring about greater scrutiny of individual costs, such as platform fees, fund charges as well as their own fees.
Advisers have increasingly been looking towards the cost-effectiveness of indexing funds, reasoning that there are many instances in which low-cost access to a market is more efficient than trying to consistently identify active managers that will outperform.
In many cases, an adviser might use an index fund for broad-based exposure to the more efficient areas of markets, while using ‘active’ funds for potential benchmark outperformance in less efficient areas, such as the mid- and small-cap sector or emerging markets.
All systems go for risk-rated funds?
The post-RDR world is also likely to pose a challenge to advisers that wish to retain clients with relatively modest amounts to invest. What could help are investment solutions which can be implemented quickly and efficiently, allowing intermediaries to continue to service such clients.
Solutions for a brave new world
Given the pressures both on investment firms and advisers themselves to deliver value for money, we expect to see a wider range of funds available in the market. Advisers and their clients may find a solution in low maintenance investments that provide broad-based access to markets but are also targeting a specific outcome, such as the client’s risk tolerance band.
This is why outcome-focused solutions, such as risk-rated funds, many of which aim to achieve their investment objectives through dynamic asset allocation, could become a key part of an adviser’s toolkit. Such funds aim to generate returns within pre-defined volatility bands. Once an adviser has reviewed a client’s financial circumstances and identified his or her risk profile, a suitable risk-rated fund can be used to match it.
Some risk-rated funds are also able to offer very competitive charges by effectively being funds of either index funds or exchange traded funds (ETFs), which in themselves are a fast-growing area.
A tried and tested strategy
As far as the use of index funds is concerned, RDR is less of a ‘new dawn’ than it is another catalyst for a trend that has already been at work in the UK for about a decade.
Its origins can be traced back to the more widespread adoption of defined contribution (DC) pension schemes and the resulting need to construct low-cost, effective investment propositions.
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