Having a more diverse spread of assets has the potential to help maximise risk-adjusted returns in a wider variety of market conditions. For example, our multi-asset solutions have exposure to commodities and commercial property which have supported performance during this inflationary period. Adopting a truly diversified solution and highlighting how broad diversification can deliver good client outcomes could help you evidence how your products and services deliver fair value under the upcoming FCA consumer duty regulations.
It’s also useful to think about the benefits of active management in challenging market environments. Active strategies can be used to help clients navigate the investment landscape rather than purely following the benchmark. They can also be used to add incremental value as market opportunities arise –something which can’t be achieved with passive strategies. We use active management in our multi-asset solutions to add value by tactically adjusting exposure to different assets as the business cycle evolves. For example, we’ve already tactically reduced our exposure to various fixed income strategies.
Dialling up risk
Increasing a client’s risk level, and therefore reducing overall exposure to bonds, is one way to potentially generate higher returns, but is this suitable practice and how would they feel about an increased exposure to risk during periods of higher volatility?
To earn higher returns, you must be willing to increase exposure to higher-risk investments. This may yield higher returns over the short and long-term, but will almost certainly yield periods of greater underperformance too - an undesirable outcome for many.
This comes back to engaging and educating clients. A lack of investment education can lead to individuals choosing lower risk solutions, so it’s imperative to continue supporting and educating clients by building conversations around taking more risk into your advice processes.
Does lower risk = vulnerability?
One of the consumer duty outcomes is ‘consumer support’. This is about how clients interact with a firm’s products and services. Part of this is making sure firms have procedures to support vulnerable clients. You could argue that risk-averse clients are vulnerable clients (now even more so!) who need support through periods of market stress. Do you have processes in place to respond to queries, offer support and capture concerns and outcomes? Thinking about it from the client perspective will not only help you get ready for these new requirements, but also help you provide a better client experience.
Read more from Royal London’s investment experts on our adviser website.
