Written by Mikkel Bates, Regulatory Consultant at FE. First published at professionalparaplanner.co.uk.
Inflation in the UK hit a record high of 2.9% in May 2017 and is set to soar to 4% in the second half of the year as per forecasts from the National Institute of Economic and Social Research. Data from FE Analytics shows the upward trend in the UK Consumer Price Index and UK Retail Price Index over the last five years to 3.09% and 6.01% respectively (as at 10th July 2017).
Last month, the FCA published the much-awaited results of its suitability study.
The review, having assessed 1,142 individual pieces of advice given by 656 firms against the suitability and disclosure rules in the Conduct of Business Sourcebook (COBS), found that in 93.1% of the cases the sector was providing suitable advice to investors. The regulator has called the results both positive and encouraging.
With the increase in number of Discretionary fund managers and Model Portfolio providers in the market, Advisers face a proliferation of options to consider. When using discretionary models as a part of a Centralised Investment Proposition it is critical to undertake extensive due diligence on the providers as you will be embarking on a close working relationship based on trust to achieve the best outcomes for your clients.
The FCA uses the expression research and due diligence to refer to the process carried out by the firm to assess (a) the nature of the investment (b) its risks and benefits and (c) the provider. The firm needs to understand these factors in order to judge whether the solution is suitable for their particular client base. With this in mind, we look at 7 key areas to consider before partnering with a discretionary service provider.
In the previous blog post Measuring and managing investment risk: Part 1, we looked at the popularity of volatility as a measure of risk and how FE Analytics can help in effectively monitoring it. Although volatility is a common measure of risk, it comes with certain inherent limitations when forecasting future performance or planning for worst case scenarios; hence Advisers ought to be mindful of an overreliance on volatility as the primary source of risk evaluation and management.
Assessing the level of risk in a particular instrument and understanding its role within a client’s portfolio is key to ensuring the suitability of your investment advice. This relationship between investment risk and suitability is currently under increased focus from the FCA, as it analyses reports from over 700 firms ahead of its suitability review that is due to be published this year. In keeping with the theme, FE conducted a survey over the Christmas period to assess Advisers’ attitude to risk with a view to better understanding how our clients identify, measure and manage investment risk.
Our focus at FE is to support Advisers, planners and wealth managers in selecting the best and most suitable investment options for their clients. In addition to award-winning research tools on FE Analytics, we offer a set of simple, reliable and accurate ratings which can uniquely work together, whatever your investment style.
It’s Christmas and whilst everybody is feeling festive – we thought we’d use the 12 Days of Christmas as inspiration and look at 12 ways FE has helped Advisers this year!
2016 has proven to be a turbulent year with the UK choosing to leave the European Union, the rise of anti-establishment politics and unprecedented levels of geo-political turmoil. These macro factors have had a significant impact on market volatility and investment valuations, emphasising the need for careful risk management of client portfolios.
At FE Invest, our investment philosophy is built around managing and adjusting risk to deliver optimal returns for clients. Below we look at 5 key investment successes our robust methodology has offered:
NOT CALLING MARKETS – THE MERITS OF DIVERSIFICATION
1. BREXIT - PROOF: The FE Invest portfolios are well diversified using strategic asset allocation from the UK’s leading stochastic risk modeller – eValue. This has helped our portfolios remain resilient without the need for short-term, tactical moves when markets faced turmoil during Brexit.
2. GEOGRAPHICAL ALLOCATION: Post Brexit, the asset allocation of the portfolios were reviewed with a general trend to reduce UK equity exposure in favour of developed international equities. By carefully considering the geographic breakdown of the portfolios, the analysts were able to avoid concentration in specific regions like North America, which has been useful in the immediate aftermath of Trump’s election as US President.
3. EXPOSURE TO GILTS: After careful consideration of strategic bonds, TAR and cash - GILTS were chosen to provide long-term diversification benefits in line with eValue’s guidance. The portfolios’ GILT positioning was increased in tandem with international equities for a healthy offset. The FE house view holds that the bond bubble thesis has very low probability of occurrence.
ACTIVE RISK MANAGEMENT
4. LISTED PROPERTY Vs. PROPERTY: Due to the significant liquidity risk associated with investing in physical property funds, the FE Invest portfolios have never held options from this asset class. Liquidity risk cannot be assessed from past performance data and our portfolio building realises on precision & accuracy in data. These downsides are however minimised by investing in listed property funds.
5. STANDARD LIFE GARS: The headline making Standard Life GARS was removed from the portfolios earlier this year. Whilst the investment industry was suspicious of the size of the fund; our concerns were around the fund’s risk management processes.
The FE Invest proposition goes beyond portfolio management. As a model portfolio service, Invest offers ongoing governance and communication to Advisers to provide a comprehensive understanding of our investment decisions and keep the Adviser in the centre of the investment journey. FE also helps Advisers keep their clients informed – we are increasingly producing specialised, jargon free written and video content for your onward distribution to clients.
Assessing suitability involves a great deal of judgement by Advisers on the appropriateness of an investment option for the client in front of them. In order to make the right decisions and get favourable client outcomes Advisers need to be competent in the nature of investments and have a deep understanding of the individual product or service they are recommending. To do this, they need to conduct objective research and due diligence of the options in consideration. In its recent thematic review on the matter, the FCA said that, reviewed firms which demonstrated good practice in assessing suitability had research and due diligence as a central function of their advice process, demonstrating that they had the client’s best interests at heart.