Multi-Asset Focus  

Getting risk profiling right for multi-asset investments

Getting risk profiling right for multi-asset investments

In an environment where the protection of investors and the assessment of suitability remain at the heart of the industry, it is unsurprising that advisers are continuing the trend of outsourcing to third-party multi-asset solutions.

Indeed, the regulator has demonstrated its continued commitment to risk management and the ongoing assessment of product suitability through the second round of the Markets in Financial Instruments Directive – Mifid II – which came into effect at the beginning of the year. 

Further, the ground swell in popularity of multi-asset solutions led the Investment Association to launch its Volatility Managed sector last year to house the raft of outcome-focused products that have been created to meet this trend.

In theory, this should assist advisers in being able to draw comparisons across various products and provide greater transparency as to whether funds are delivering on their stated targets. It marks the latest step in the evolution of risk profiling and implementation, a process that is vital to the success of this sector but is not always easy.

“The nature of risk profiling is that it is multi-faceted and we need to take time to understand the various components,” explains Andrew Harman, senior portfolio manager, multi-asset solutions at First State Investments.

“We have to balance the attitude to risk, the investment horizon and the changing balances of the portfolio over time. We also have to have a clear understanding of the clients’ underlying goals, as well as their liquidity needs. 

“In addition, when having those conversations with clients, advisers can be faced with someone who wants a high return but low risk. There can also be a difference in perception as to what constitutes risk. A good example of that is the current situation with cash, which can actually be seen as being risky as it is offering a very low return and purchasing power can be compromised.

"Equally, asset classes such as US equities may have the potential for greater short-term volatility but could offer a higher return over a longer time period. It is a case of getting the balance right for the individual client and updating that risk profiling over time.”

From simple questionnaires to an integrated approach

For Jim Henning, principal consultant at Dynamic Planner, it has been interesting witnessing how the risk profiling process has changed and developed over time. He has seen a move from relatively simplistic questionnaires to a more integrated approach to assessing risk appetite and applying that to the multi-asset solution that is provided to meet the clients’ needs. 

“Initially risk profiling tools only went so far, looking at the psychology of the client in the form of psychometric analysis but failing to adequately take into consideration the client’s capacity for risk,” he says.

“While they may have a high appetite for risk, they may not have the capacity to take on that level if they need to access that money or if they can’t actually tolerate losing the money if things don’t go according to plan.