post-rdr first quartile performance

First quartile funds that fluctuate within the risk spectrum will not be deemed suitable for many clients after RDR, forcing advisers to change the way they screen products, according to Mike Webb CEO of Rathbones Unit Trust Management.

post-rdr first quartile performance


He said in the new financial services landscape the onus will be on client suitability and particularly their propensity to deal with loss and their risk profile.

Too many funds are set up with a focus on risk ratings, which may be at one end of the spectrum at the time of investing but can see-saw to the other end while a client’s money is still invested.

"This is happening against a backdrop of an industry that thinks you have done well if you beat the competition. That game is increasingly over and the regulatory background is going to drive it," Webb explained.

Advisers will have to look at each individual client’s capacity for loss and at their risk profile. In trying to translate that into a portfolio, they cannot afford to have a fund that is first quartile but changes its risk quota on a day-to-day basis.

For this reason risk-targeted funds, rather than risk-rated funds, will be the way forward.

Risk-rating deficiencies

Webb pointed to the deficiencies of software programmes such as Distribution Technology, which is used by a large portion of intermediaries to inform risk analysis.

He said: "Distribution technology is happy to rate a fund from its risk profile and so advisers invest in a fund that moves its risk profile from a Distribution Technology rated five to eight, meaning they have significant liability from a regulatory perspective, let alone from the expectations of their underlying clients."

Webb thinks risk-targeted funds will become the most important drivers for those seeking core investments or those looking to outsource investment decisions in one form or another.

In the development of RUTM’s risk targeted funds he said the firm asked its 35,000 high net worth clients what mattered most to them. 

"What did not matter was whether a fund was first or second quartile, what mattered was whether we were meeting the objectives we agreed at a particular time and if the target continued to meet these," he concluded.



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