Platform benchmarks fail to show if client aims will be met

Platform benchmarks fail to show if client aims will be met

Advisers should be aware of the benchmarks for the portfolios they get through their platform, Ben Goss has warned.

The chief executive of Dynamic Planner was speaking after the interim report of the Financial Conduct Authority's platform market study raised concerns about this issue.

The 110-page report, published on Monday (16 July), found information available on platform in-house model portfolios’ past performance was "highly variable".

He found that often there was no benchmark available, and, where there was, the benchmarks for similarly labelled portfolios varied across platforms.

Mr Goss said the use of risk adjusted returns was a key determinant of value for money for consumers and that benchmarks are poor measures of whether a client will meet their objectives.

He said: "I think the FCA is wanting to shine a light on value for money and risk adjusted returns.

"The return of the FTSE is irrelevant to the objectives of a client who is retiring and thinking about the amount of income they want.

"In the context of someone wondering what level of income they want, the return of the FTSE or Libor is neither here nor there."

He said any benchmark should be risk-based, relevant to the investor’s risk profile and strategy and independent of the asset manager.

The FCA's platform study found that for model portfolios structured as Ucits, the majority had no benchmark declared in fund prospectuses.

When benchmarks were disclosed they included Investment Association peer group, private peer indexes, single asset indexes such as the FTSE 100, the inflation rate and Libor. Others were a composite of indices but in some cases the construction of the benchmark was not clearly disclosed.

Mr Goss also warned the FCA's proposals to formalise risk definitions would not work on its own.

In the report the FCA found similar risk labels were being applied to very different portfolios and investors may not understand the likely risk/returns they face.

The FCA found the information platforms provide about these model portfolios made comparison difficult, and similar sounding labels - such as 'cautious', 'conservative', 'balanced' - were found to expose investors to significantly different underlying assets and volatility in returns.

But Mr Goss said while he agreed with the FCA's findings, he also warned that not all products in the marketplace were the same.

He said the only answer would be a full independent assessment of portfolio risk, looking both at historic allocations, strategic allocation, historic and future expected volatility assumptions that align with a client risk assessment tool using the same underlying risk/reward metrics.