How to assess multi-asset fund suitability

Supported by
First State Investments
Supported by
First State Investments
How to assess multi-asset fund suitability

As multi asset investing has grown in popularity over the past decade it has made the craft of assessing the suitability of funds in a portfolio more complex.

The performance of the Investment Association’s four multi-asset sectors in 2017 shows that the average IA Flexible Investment fund came out on top with an 11.19 per cent return, according to FE Trustnet data.

The reasons behind the growth are driven by the opportunities a multi asset strategy gives to invest across an entire universe of asset classes globally, including equities, fixed income, commodities, and cash.

A multi-asset approach offers real-time risk insight and the ability to adjust portfolio positions for prevailing market conditions. Andrew Harman

Andrew Harman, portfolio manager at First State Diversified Growth Fund says: “[It] can provide a high degree of diversification and a better risk-adjusted return than a single asset class option, such as fixed income or equities in isolation.

"Additionally, a multi-asset approach offers real-time risk insight and the ability to adjust portfolio positions for prevailing market conditions.”

Amid this growth advisers and private investors have outsourced their investment decisions more and more to fund managers with a remit to allocate across asset classes.

The role of advice

So what role do advisers play in assessing the suitability of a portfolio?

Suitability typically looks at how appropriate the funds are in relation to how they match the client’s needs, objectives and attitude to risk.

According to Scott Gallacher, director at Rowley Turton, his method involves looking at how the fund is invested in terms of asset allocation, volatility and then tries to match that to the client’s needs.

“[If you don't do it right] you might end up with a portfolio that is medium or lower risk even though it might contain high risk funds because not all funds are 100 per cent correlated," he adds.

“We also look at correlation of data, because if they are all doings things in the same way we might find the portfolio is not improving in terms of risk or return.”

To help in assessing the suitability of the portfolio Mr Gallacher uses a software tool which he said gives him more in-depth information at the click of a button.

Without the software, he says the job would be more difficult, because it would involve pulling out the data and a lot more manual and independent study.

At wealth management firm Lockhart Capital management, chief investment officer Andrew Wilson says when considering suitability, he takes into equal consideration the volatility and valuation of the funds.

There’s a difference between the risk you might be prepared to take and how much you need to meet your financial plans. Andrew Wilson

He also believes that having an in-house investment planning team gives the firm an advantage because the advisers have complete oversight of what his team is doing and the client is also much closer to the asset.

According to Mr Wilson, software tools can be useful, but he says the numbers are just the “starting point of the conversation”.

He adds: “People use various bits of software but for us that is just the starting point of the conversation, because there’s a difference between the risk you might be prepared to take and how much you need to meet your financial plans.

“It is quite a holistic conversation between the advisers and clients, where you also need to consider factors like mortgages and school fees.”

The critical nature of suitability is what drives advisers to want to know their clients inside out to prevent the client from doing the wrong thing at the wrong time when matching them with the right funds.

“You need to get the right risk profile; not letting them get excited during the good times and then suicidal during the bad times.”

At Sanlam Four, senior multi-strategy fund manager Mike Pinggera says his team spends as much time with advisers as they require.

“That ongoing relationship; making sure we communicate what we are doing in the fund, what we are thinking and how we are positioned.

"Different advisers will have different processes. Some will have a quarterly review and some may do an annual review and some may do it on an adhoc basis, so their individual processes will really drive their interactions with us.”


Over the years many advisers have outsourced investment decisions, but advisers play a critical role when it comes to assessing the suitability of a portfolio.

John Husselbee head of multi asset at Liontrust says: “The regulatory responsibility lies with the financial adviser and their ongoing know your client analysis. In truth, however, all parties have a role to play in ongoing client suitability.

“For the fund manager or DFM, that involves consistently following their objectives and remaining within the long-term risk corridors for each portfolio. This is usually supported by internal and external investment oversight as well as transparency to the adviser.”

A report from Platforum last year warned that advisers are still on the hook for their choice of outsourcing partner, while DFMs also told the platforms expert it is often difficult to make it clear to advisers that they must take responsibility for suitability, whilst the DFM is responsible for the mandate.

The report added: “Managing investment risk is often a driver for investment outsourcing, but our conversations make it clear that by outsourcing advisers do not absolve themselves from responsibility to the client.”

Some DFMs also suggested to Platforum that in a bull market advisers may be more optimistic that they can manage the investment risk effectively.

Echoing her words Mr Gallacher agrees the job of assessing the suitability of a multi asset portfolio has been complicated more in a rising market.

He says: “When things are going well in the market suitability is massively overlooked. In a rising market everyone gets away with it but the problem is people don’t sell out of that fund in the good times so when the funds fall, they panic and pull out, and then lose out on the return and recovery.”


As a result Mr Gallacher believes some advisers are not good at giving customers the full “hard truth” about what could happen to a portfolio in the bad times.

“I get criticised by clients for being too negative. We intend to look after our clients for the next 20 years which means we will probably be around for the next crash. In every communication we send them we remind them of the downside.”

The proliferation of multi asset products will have made suitability assessments harder, but Mr Pinggera says the number is not the issue, but rather the level of understanding the adviser has about the funds.

He says: “As an adviser you only have the capacity to cover so much. You cannot realistically in detail look at everything. The number of funds is not particularly a concern, but the requirement in the level of understanding people need - that has gone up.

“From my perspective all we can do to help is be as transparent and as open as possible and try wherever possible to make it an ongoing relationship so people do have access to the fund managers.

"People have an absolute right to know what we are doing with their money. Sometime you get the feeling some fund managers feel as if they are doing you a favour, but transparency should be demanded.”

Ima Jackson-Obot is a features writer for Financial Adviser