InvestmentsOct 1 2012

Defaqto: “Not a one size fits all option”

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ByAdrian Gaspar

The world of UK investments has become increasingly complicated, driven by innovative products, regulatory pressure and volatile markets. Outsourcing the thorny process of picking clients’ investments is something advisers have mulled for some time.

Recent years have seen a proliferation of outsourced investment products and services - model portfolios on platforms, multi-manager funds, funds run or overseen by adviser firms, discretionary fund portfolios, unitised discretionary funds and funds that target set levels of risk.

Many advisers have found it challenging to run model portfolios for clients. Aside from the administrative work involved, the task of ensuring the model remains fit for purpose and meets the client’s ‘risk budget’ and aspirations regarding their investments is significant.

Risk-targeted funds are designed to remove a lot of this burden. These solutions will generally invest in other funds or mandates (some buy securities directly) and, importantly, seek to ensure that each fund stays within a particular ‘risk budget’ as defined by the volatility of its investments over the medium to long term.

The regulatory burdens imposed by the RDR make products of this type very attractive, although the FSA has been very clear in saying no investment solution should be treated as a ‘one size fits all’ option for all clients.

Outsourcing also does not absolve the adviser of the responsibility to carry out robust due diligence on recommended funds and to monitor their adherence to objectives on an ongoing basis.

In addition, it is very important to distinguish between multi-manager funds that have been assigned a risk rating and those which are designed to adhere to clearly defined risk parameters. The key message is to look past the numbers and understand the underlying components of each fund.

In spite of all this, even those advisory practices fortunate enough to have the resource and expertise to assess funds and make their own asset allocation decisions may still decide that risk targeted solutions, or other outsourcing options, are perfectly suitable for clients with whom they have a more transactional relationship.

Adrian Gaspar is senior consultant at Defaqto