As advisers come under increasing pressure (with the approach of RDR implementation) to meet the needs of their clients right across the fee and service proposition, risk-rated products are likely to play a big role.
But legacy multi-asset funds that have been “retro fitted” with risk ratings by some fund houses are likely to have a greater volatility range than those funds launched with the aim of targeting a certain risk profile, according to Allianz GI.
In a review of funds with the risk profile five and six (two of the most popular profiles) Allianz GI found legacy multi-asset funds that had been retrospectively risk-rated had less predictable volatility over three years when compared with “bona fide target risk funds”.
Allianz GI said in one instance a retrospectively risk-rated multi-asset fund which had a risk profile six had volatility ranging from a low of 8.3 to a high of 15.3.
Nick Smith, managing director at Allianz Global Investors, said: “While we welcome this focus on risk, advisers and their clients need to understand that while these retrospectively risk-rated funds may look like target risk funds they are fundamentally different, and they may not maintain their risk profile over time.
“Put simply, they are not designed to do so. Target risk funds on the other hand have risk management engineered into their DNA and not just bolted on afterwards.”
FSA warning
Smith added that in the FSA’s Assessing Suitability paper the regulator warned that where there is a misalignment of the product risk description and the risk profile of the client there is a danger of systemic mis-selling.
For this reason, he predicts that in the long run retro risk-rating may prove a costly industry shortcut as some advisers might find themselves with clients in investment portfolios that are too general in their remit or exposed to risk levels they are not comfortable with.
This same subject was visited by Portfolio Adviser back in June after Rathbones’ CEO Mike Webb warned advisers would be forced to change the way they screen products following RDR implementation because first quartile funds that fluctuated across the risk spectrum would not be deemed suitable for many clients.
He said too many funds were set up with a focus on risk-rating rather than risk-targeting and so they might be at one end of the spectrum when first invested but can see-saw in volatility while the client’s money is still invested.
Allianz GI’s analysis was done with the help of Lipper and looked at the annualised standardised deviation of UK Oeics on a total return, ex-dividend basis, over 36-month rolling periods from end of June 2005 to end of June 2012.
