Going a step further, using data captured from Defaqto Engage, we know that advisers are also using core/satellite approaches at single risk profiles.
For example, 80 per cent of a recommendation may be made up of a single risk-rated fund and then the balancing 20 per cent allocated to a more esoteric solution, albeit risk-rated at the same level.
It should be noted that blending solutions rated at different risk levels to achieve a single risk-rating does not work, due to correlation issues.
For example, a risk-rated ‘4’ solution should not be mixed with a risked-rated ‘6’ solution to achieve a risk profile of ‘5’ outcome.
So, in conclusion, blending solutions of the same risk level can have some benefits, but additional effort is required on the adviser’s part to really understand what is going on inside the solutions they select.
Simply recommending several multi-asset solutions to increase diversity only works if the underlying assets are genuinely different and therefore increase diversity.
Paul Tinkler is insight development manager (Funds & DFM) at Defaqto
