Many risk controlled investment solutions, , focus primarily on doing just that, controlling risk, and in doing so lose sight of the fact that the client will have a return requirement – the reason for the original investment . As a result, the returns produced are almost accidental, and while the function of controlling risk serves to give the adviser comfort that the regulator is not going to come knocking on his door, the client is often left wanting.
To illustrate this, if all funds classed by the IA in risk category 3 are compared in terms of 12 month performance, the differential between top and bottom performers is significant, with the top performer returning 8%, the bottom performer losing 8%. This suggests there are different primary objectives at play, and bearing in mind that all should be aiming for the same level of risk, that managers take pointedly different approaches to controlling risk in their portfolios. A client, when told they will not be able to “beat the building society” is unlikely to be comforted by the fact they remained within their risk tolerances. Although the outcome has met the advisers main objectives, the solution, has solved the wrong problem.
Clients engage with advisers to see their money grow. Of course, saving tax, protecting their dependents, and doing all of this without taking too much risk, go hand in hand, but their ultimate aim is to increase their assets.
Risk controlled products have an important part to play in financial planning, but advisers need to focus first on delivering returns, and then on managing risk to ensure those returns are in line with their clients’ expectations. Only then, will we be providing the right solution to the right problem.
