Meeting clients’ appetite for risk is fundamental to delivering suitable advice. The challenge is building a portfolio to accommodate this, while still delivering strong returns. Nick Henshaw, Head of Intermediary Distribution at Wesleyan, the financial services mutual explains why a smoothed With Profits fund could provide the perfect foundation for effective, flexible and risk-adjusted portfolio building.
The perception of risk can be something that prevents people from taking even the first step on their investment journey. Many are put off by the understanding that they cannot control the risk. In fact, a recent Wesleyan poll of 2,000 Brits found that more than half (55%) said investing was just too risky for them.
As every adviser knows, there is no risk-free financial decision, nor a risk-free investment pathway. But, as the sector demonstrates daily through its service and support, there are myriad ways to manage risk and tailor investment approaches to meet clients’ specific needs. Indeed, no advice can be considered suitable without it.
When it comes to risk, then, advisers have a number of challenges and considerations.
First, is helping assess appetite to risk – and its bedfellow, capacity for loss. Next is building a portfolio that will meet this appetite and deliver against clients’ long-term objectives. And then there’s adapting this portfolio to changes in clients’ risk tolerance.
Risk appetite cannot be considered a constant. It can, and most often will, evolve in line with a clients’ circumstances, life stages and external market conditions. This is something that we’ve seen recently following the past year’s choppy economic waters.
The same consumer research that highlighted people’s aversion to risk also found that almost half (46%) of UK adults felt they were less likely to invest because of recent market turbulence – a clear indication of how volatility can affect investment appetite and how it needs to be actively managed.
Two ingredients are therefore desirable for any adviser looking to construct an effective, risk-balanced portfolio.
They need strong, reliable performance. And they need the flexibility to scale up, or down, risk – in line with clients’ changing appetite.
With this in mind, it’s easy to see the appeal of a smoothed With Profits fund that offers low volatility and a strong historic performance, as the foundation for a portfolio.
Ultimately, this delivers returns, while unlocking all-important flexibility in how advisers construct the rest of clients’ portfolios.
Overall volatility can be reduced even further or increased elsewhere – with the With Profits fund as a baseline should clients want to dial-back volatility and risk in the future.
So, how does With Profits deliver these features?
The low volatility is in part achieved through a mechanism that ‘smooths out’ fluctuations in market movements. This holds back some returns during times of strong performance and favourable market conditions, which can then be ‘released’ to cushion any fall during periods of weaker market performance.
In the case of Wesleyan’s With Profits Growth Fund Series A, this is done through a daily response to market movements, meaning the fund is daily priced, daily traded and daily smoothed, which avoids the need for sharper or unexpected corrections – ultimately delivering a less ‘bumpy’ investment journey.