The increase in the number of multi asset, risk based investment solutions should not be a surprise, but the question advisers should really be asking is, “who do these solutions serve?”
Risk based solutions tend to fall into two camps; risk targeted and risk rated. The first seek to manage their asset allocation and fund selection, to ensure that they live within prescribed risk tolerance bands. On the other hand, the latter are rated by independent organisations to demonstrate they have lived within prescribed risk bands in the past. Such funds are either given a description of the risk associated with the model, are allocated a number, or colour, which relates to the attitude to risk an appropriate client would demonstrate.
In a world where risk and suitability weigh heavily on the minds of advisers, both solutions appear to solve a problem. However, we need to establish if these solutions are solving the right problem for the right person
The reality is that until advisers started using such terms, clients wouldn’t have described themselves as “moderately cautious”, “balanced”, “4 out of 10”, or, perish the thought, a colour. Instead, clients would explain what they wanted to achieve from an investment.
In real terms clients ask for a “reasonable return” or to “beat the building society”, often adding as an afterthought “without taking too much risk”. These were terms our customers understood, that were tangible to them and that clearly laid out what they aimed to achieve. But today, our preoccupation with controlling risk has distanced our focus from delivering returns for clients. Have we, in trying to do our job, in fact developed investment solutions designed to serve the advice process rather than our clients’ needs?
