Skill of matching clients to right portfolio model

When entering a discretionary fund management relationship, the service should always start with the client and a deep understanding of their goals, their hopes, their fears, their prejudices and their aspirations.

Once this is understood, then the starting point for matching the client to the right portfolio model is risk profiling, in order to find out the optimal level of investment risk the client is prepared to take.

Risk is not one-dimensional. It should take into account the risk required to achieve the client’s goals from the financial resources they have available, the risk the client can afford to take based on their current circumstances, and the amount of risk they are personally comfortable taking.

During the discussion there may be some trade-offs that need to be made between these points, which will inform the overall financial plan.

Once the risk profile has been established, the client can be matched to a portfolio that spreads their money and therefore their risk.

There are thousands of funds available to investors in the UK, so picking one is hard work. Many of them include words such as ‘balanced’ or ‘defensive’, but the difficulty is that the mix of risky and less risky assets will vary from manager to manager.

A client would probably expect a balanced portfolio to offer a good spread of risky and less-risky assets. However, of the many balanced funds available, the equity content can range from 50 per cent to as high as 80 per cent.

In order to compare and make an informed selection, advisers and investors need to get under the skin of the portfolio. It is crucial to understand its risk profile – the mix of riskier assets, such as equity, property, commodities and absolute return funds, and the less risky assets, such as fixed interest and cash-based funds.

Advisers should be able to explain this mix to their clients, so they understand how their chosen portfolios match their risk profiles to meet their personal financial plans.

Once the product has been selected, it’s down to the manager to exercise control over the investment process to ensure it remains within the agreed risk parameters.

Again, different managers will have different processes and it is important when selecting a discretionary fund manager to understand their specific procedure – and to be able to articulate it to clients so they understand how it meets their needs.

The investment process will often be a combination of strategic and tactical asset allocations.

Strategic asset allocation sets target amounts for different types of investment with varying risk-return characteristics. These can include actively managed funds or passive vehicles that aim to track the market index or a combination of both.

Tactical asset allocation is a short-term adjustment applied to the asset distribution of a portfolio to reflect the economic and market outlook, with the aim of improving returns or reducing losses. This involves macroeconomic research to review current market conditions, and analysing each asset class to assign a tactical viewpoint.

A fund manager cannot dictate stockmarket movements. With the right financial plan in place for the client’s goals and risk profile, matched to the right portfolio, it is possible to control the investment risk and maximise the potential return.

Steve Williams is a portfolio analyst at Montage Portfolio Management