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.
Have you thought about your brand?
What do Uber, AirBnb and Netflix have in common? Valued at $66 billion and $30 billion respectively, Uber and AirBnb are the world’s largest taxi and accommodation service albeit not owning a single vehicle or property. Similarly, valued at $42 billion, the content distribution service Netflix only recently started producing content yet is worth nearly as much as big production houses such as Time Warner and Century Fox. These brand valuations are thanks to the rise of the sharing economy within the service industries - causing significant change in consumer expectations, attitudes and behaviour. There is immense dependence on the ‘brand’ to stand for something and provide the promise of a level of service. Unlike product brands that can provide something tangible; what most professional services organisations sell, including financial advisers, is often intangible before point of sale and the benefits cannot be fully “experienced” until after purchase.
Earlier this summer, a statement from the newly appointed Director of Supervision - Wholesale, Investment and Specialists at the FCA – Megan Butler proved that suitability is right back on top of the regulator’s agenda as they believe ‘firms still need to up their game’ whilst demonstrating suitability within their portfolio recommendations. The statement warned that the regulator would continue its scrutiny of wealth management firms until they gain satisfactory evidence that firms are stepping up and looking at suitability ‘as the day job’ rather than a regulatory checkbox.
The topic of charges and fees is usually on the regulator’s radar. The RDR published in 2012 aimed to rectify ‘opaque charging structures’ within the advice market and since then the regulator has kept a close eye on the matter. Recently the FCA conducted a deep dive review of Adviser charging structures in its newly published Adviser survey report which found that 89% of the respondent advisers charged clients percentage fee, 44% had fixed fees and 27% reported hourly charges (titled ‘FCA survey of firms providing financial advice’, published on the 1st of July 2016 –click here to read in full). On the provider side too, across Europe there have been calls for improvement in the communication of fees and charging structures to the end investor (via KIIDS, PRIPS) in a bid to help investors navigate through the variety of charges that can erode/affect their portfolio. However, most investors remain unaware of hidden costs that are unaccounted for in glossy literature from product providers.
FE would like to congratulate all the winners of the Fund Manager of the Year Awards 2016. FE's Gary Wheeler and Mika-John Southworth presented the Global Group and UK Income awards to Fidelity International and Evenlode Income on the night (pictured below).
Fund Managers - the mythical sirens of the asset management industry lure in vast amounts of money and admiration with their perceived intellect and skills. As of April 2016, records show that managers in the UK are responsible for an impressive £928 billion held in investment products (stats from the Investment Association’s website). With some star managers managing over £800million in a single fund, it is safe to say that a handful of individuals hold the prosperity of many of the UK’s investors in their hands and often their judgments decide if money invested doubles in value or vanishes overnight.