It was interesting to read reports this morning about the Financial Conduct Authority (FCA) cautioning advisers over their use of risk-rated funds.
These are typically multi-asset funds (investing in a range of different investment asset classes) which use historical data to give an estimation of how the fund might perform in the future.
FCA technical specialist Rory Percival is reported as saying they have concerns about the mapping of a client risk profile to a particular risk-rated fund or portfolio.
Just because an investor is described as ‘three out of ten’ on a risk profile scoring system, it does not automatically follow that a risk-rated fund described as ‘three out of ten’ will be suitable.
He pointed out that advisers also need to think about capacity for loss, client knowledge and experience and the term of investment.
The context in which risk-rated funds are recommended is important in this respect.
Here at Informed Choice, we don’t typically recommend risk-rated funds.
We prefer to follow a six step investment advice process which takes each client from establishing their financial objectives to the selection of suitable funds to populate an agreed asset allocation model, with regular ongoing reviews to ensure any recommended portfolio remains suitable.
Apart from the difficultly in mapping a risk score to a risk-rated fund, it is often difficult to control the risk level of a multi-asset fund, instead needing to rely on a fund provider to make important asset allocation decisions.
Earlier this month we took the decision to outsource the management of our asset allocation models to a third-party who offer a powerful and sophisticated asset allocation model which is supported by a dedicated and expert Financial Analytics Team.
This means our risk profiling system dovetails perfectly into the asset allocation models we use, with an agreed risk level for any investor mapping to one of a series of regularly maintained asset allocation models.
From there, we can populate each asset class with suitable funds based on our comprehensive fund research which covers every investment sector.
We also, as you would expect, consider such factors as capacity for loss, client knowledge and experience and the term of investment.
Rather than delegating responsibility for risk management and fund selection to a fund provider, we view this as an important role for the Financial Planner.
If you would like to find out more about our wealth management proposition, do get in touch.
We offer an initial meeting which is at our expense and without any obligation. Call us on 01483 274566, email hello@icl-ifa.co.uk or complete our online enquiry form to get in touch.
