Advisers who are not diversifying clients portfolios and being overweight in equities risk ending up on the wrong side of the regulator, a Cass Business School academic has warned.
Speaking at a session on investment strategies during the IFP annual conference at Celtic Manor in Newport, professor of finance Stephen Thomas said advisers investing on behalf of their clients can “lose money for huge amounts of time” by being long on “overweight” equities and not diversifying,
He said: “The FCA is very aggressive at pointing out that the advisory community is very bad at putting people into cash.”
Mr Thomas said cash was one example of a low-risk asset that is sometimes overlooked, adding: “The old story was you put money into equities, go to sleep and it would be fine. But the reality is that during the 20th century the wait for returns on equity in the UK could be as long as 30 years. In Austria, you could wait 97 years to get your returns in the equity market during the 20th century.”
Mr Thomas noted the popularity of risk parity – the concept whereby advisers have fewer volatile assets – and said that advisers should have a mix of investments to avoid “jumping around” between different assets.
He said: “You need a bit of exposure to everything. What you are doing with risk parity is shuffling around the asset classes, but it is giving you exposure.
“You cannot predict when you need exposure to inflation or economic growth exactly. You do not have to second-guess what is happening in the world.”
Predicting a gradual shift away from the bond market as investor sentiment changed, he said: “In the 30-year bond bull market, people gradually increased their exposure to bonds. With the bear market, they will gradually decrease their exposure to bonds.”
The FCA’s market study of October 2013 on the cash savings market looked at whether competition in the market for cash savings was working well for consumers. It found that 82 per cent of adults in the UK have savings accounts, holding a total of £699bn, but many savers were being penalised by poor rates and low levels of switching.
Conference attendee Adrian Smith, director of Meriden-based Adrian Smith and Partners, said: “The one key phrase is ‘risk parity’. As a portfolio construction tool, it is subject to debate.”
