“Therefore, it is of paramount importance to ensure the proposed product continues to match up with your client’s level of risk."
Interrogating the management process
According to Mr Phillips, while “there are no certainties in investment”, having a process is likely to provide a more consistent and predictable outcome and is likely to be less reliant upon the whims of one individual or their tenure at a particular fund house.
He adds: “Successful multi asset investing does not necessarily require huge resources or massive teams of analysts, as it can be successfully implemented from a top down point of view, i.e. making the right calls on which asset class to be in.
“There has been much research done showing that it is these decisions that are responsible for outperformance over the longer term.”
What is the purpose of the fund?
According to eValue’s Mr Moss, the industry often focuses on volatility of returns to be the sole measure of risk, and forgets the objective the consumer has for investing.
This means the client’s end goal needs to be considered. He comments: “For example, a few years ago a bank recommended to its customers a cautious multi-asset fund to draw income from in retirement.
“The problem was the income drawn was beyond the ability of the fund to support, so the bank’s customers saw their capital depleted rapidly. The fact it was risk-rated as cautious did not mean it was cautious for the purposes of drawing an income.”
Regulatory concerns
For advisers and clients, the consequences of getting the fund selection wrong are serious.
Regulators have stipulated the importance of knowing the client and making sure the fund recommendation is suitable for the customer’s circumstances and needs.
The Financial Conduct Authority has provided some guidance on how this might be achieved in its 2016 review, Assessing Suitability: research and due diligence, but the guidance is not exhaustive or prescriptive.
If a regulated firm follows the guidance, the advice it gives is by definition compliant.
But the regulator clearly has concerns. Mr Robertson comments: “The regulator has voiced some concerns over the use of risk-rated funds, with one area of fear being the ‘mapping exercise’ that some advisers might use."
In April this year, in consultation on implementing the Financial Advice Market Review (which is still open for responses until 11 July) for some aspects, including doing fact-finds, the FCA suggested advisers could use a psychometric risk questionnaire to assess risks, but said it could not be prescriptive about a universal fact find.
