Right strategy, right goals

For some advisers, their business model means they see themselves as investment specialists and want to take full responsibility for their clients’ investments.

However, RDR, the FSA’s suitability paper, volatile markets and increasingly complex investment strategies are making many other advisers think carefully about how best to fulfil their clients’ investment needs. In many cases, that will mean externally managed multi-asset investment strategies in one form or another.

Clients within flexible retirement products pose a particular challenge, as it is not just investing during the accumulation phase which advisers need to consider, but also financial goals during the decumulation phase. For example, as a result of a short-term market fall a client would need to sell more units in their portfolio to maintain the same level of income, which could lead to a long-term funding shortfall and directly impact their quality of life.

The first consideration has to be how much of the investment decision-making advisers want to devolve. Even advisers who consider themselves investment specialists may rely on a certain level of external support, while still positioning themselves as having an “own-brand” investment proposition. This may reduce the costs associated with running an investment process but is less effective in mitigating the risks. From a regulatory point of view, the adviser still needs to carry out research at each stage of the investment process, which is potentially a huge drain on resources, as well as the fact that they retain responsibility for managing investment risk.

It is this that is driving a growing trend towards externally managed multi-asset strategies. The advantage of this approach is that responsibility for investment research, choice and performance sits with the provider rather than with the adviser. The adviser’s role is to choose the right provider and strategy for their clients. It also means the adviser can focus on ensuring the strategy’s risks, volatility and performance profile is the best possible match to their clients’ needs and aspirations.

In their most basic form, multi-asset strategies can simply be off-the-shelf funds where a provider takes responsibility for asset allocation and market risks, stock selection, and ongoing portfolio management and rebalancing. Moving up the scale in terms of sophistication are risk-based funds, and finally discretionary fund manager (DFM) solutions. The latter are often seen as the preserve of the very wealthy. However, this does not have to be the case, with a growing number of DFMs offering access to managed model portfolios in addition to fully bespoke portfolios. This means they are a viable option for many clients in flexible retirement products, particularly in the latter part of the accumulation phase and into the decumulation phase.