A major accident is brewing, I suspect, with the rise of the risk-rated fund.
I think most people are comfortable with what represents higher risk, particularly in the short term, but there is a real problem providing lower-risk investors with an acceptable solution that fits their tolerances.
I can’t think of anything that is low risk at the moment. Sure, it is extremely unlikely that UK government bonds, known as gilts, will default, but low-risk retail investors are interested in what happens to their capital balances, not the security of individual holdings within their fund portfolios.
The problem with risk-rated funds is that they are rated retrospectively. But it’s what lies ahead that poses the threat – and this requires subjectivity, a commodity that cannot be dealt with other than with the benefit of hindsight.
We all know that gilts are overvalued. Yet how soon will it be before a firm is penalised for giving good advice that does not fit known risk criteria? A traditional 50/50 split between cash and gilts would have lost investors money as they approached retirement in the past year, yet that is still the mix of assets promoted by the low risk-rated funds.
The biggest risk for advisers is in not following the risk rating of a fund. The biggest risk for investors is in listening to them.
Andrew Merricks is head of investments at Skerritts Wealth Management
