Your Industry  

Pros and cons of risk-rated, targeted and managed funds

This article is part of
Guide to Risk-Rated, Targeted and Managed funds

A limitation of using a risk-defined fund range to manage client investment suitability is that risk is fairly subjective, warns Martin Bamford, Chartered Financial Planner and managing director at Informed Choice.

One investor’s definition of risk is unlikely to precisely match another, he says, and trying to determine a suitable level of risk is something that takes a great deal of expertise. Simply opting for a risk-rated fund is unlikely to give the perfect answer for all investors.

Mr Bamford says: “Risk also changes over time; due to changing investor attitudes, objectives or the underlying financial market.

Article continues after advert

“What might be suitable at outset is unlikely to remain the right solution for the life of the investment.”

The view from those that manage such funds is that their virtue lies in their ability to provide a consistent, repeatable process which is affordable for the customer and profitable for the firm to deliver, according to Lorna Blyth, investment marketing manager of Scottish Life.

For the adviser, Ms Blyth says risk-defined funds can also “help firms to delegate responsibility for investment decisions to the fund manager and de-risk their business”.

She adds: “These funds can be lower cost than providing a bespoke solution for the client and often come with ongoing reviews.

“On the other hand a firm must be comfortable that its clients have the necessary knowledge and experience to understand the risks of the underlying investments held within the fund.

“This is particularly important where the fund uses alternative investments or a risk managed approach. As with any recommendation it is important to conduct due diligence and review the decision on a regular basis to ensure it is still appropriate for the client’s objectives.”

Patrick Connolly, Certified Financial Planner at Chase de Vere, says risk-rated, risk-targeted and risk-managed funds can be an easy solution for advisers to provide broadly appropriate investment solutions to their clients if they do not have access to comprehensive research resources.

With these funds, Mr Connolly says the adviser is unlikely to go too far wrong and should be able to show they are meeting client needs from a regulatory perspective if they can demonstrate that the initial advice is appropriate and they have correctly matched the client’s requirements with the selected fund.

Mr Connolly says they can also be a compromise solution if a client is unable or unwilling to pay for a bespoke investment portfolio or regular investment reviews to evaluate the performance of their portfolio and implement any necessary changes, as hopefully very few changes will be required.

However, he agrees with Mr Bamford that there are absolutely no guarantees with this type of fund, which must form part of the thinking and be clearly explained to the client.

Mr Connolly says: “Investment performance is often unpredictable, otherwise we would all be very rich, and there is a real danger of performance and volatility of these funds being markedly different from what the investor had expected.