With the proliferation of multi-asset funds from various providers, advisers might well feel they are spoiled for choice.
Ben Willis, senior investment manager for Whitechurch Securities, says it is unusual these days to see just one, standalone multi-asset fund on offer from a fund manager.
"Providers", he says, "will offer a range of funds, tailored to meet specific risk profiles. Traditionally, these would have sat within the old Investment Association sectors: Cautious, Balanced and Adventurous, which will limit the amount of equity exposure in the fund."
Now, these sit across four sectors: the three Mixed Shares sectors and the Investment Association Flexible Investment sector, as outlined in the first article in this guide.
But how can an adviser choose which one from these four sectors might be right for a client? And how, importantly, does one get the risk/return balance right for each individual client?
Risk profilers
Many investment advisers will use risk profiling tools to help assess the client's risk tolerance and risk appetite, with a view to defining a particular band of risk within which the client will be comfortable.
This can often lead to investors being directed towards the middle or either end of a spectrum of risk-rated model portfolios - often seven - with seven being the most risky and one being the least risky, as a guideline for the adviser to assess what sort of portfolio from a wide variety of fund managers would be the best fit.
Risk profiling tools have come a long way since the first suitability review of the sector back in 2011, when the former Financial Services Authority (FSA) (now the Financial Conduct Authority) found the over-reliance on "flawed" risk profiling tools could lead advisers to make decisions for their clients which could be prejudicial.
The 2011 report found that nine out of 11 risk profiling tools “had weaknesses which could, in certain circumstances, lead to flawed outputs” and led to questions as to whether these were fit for purpose.
Descriptions of risk on some tools were so unclear the FSA gave their creators a 'red flag' on the scoring system. Which was bad.
At the time, the FSA wrote:
- Although most advisers and investment managers consider a customer’s attitude to risk when assessing suitability, many fail to take appropriate account of their capacity for loss.
- Where firms use a questionnaire to collect information from customers, we are concerned that these often use poor question and answer options, have over-sensitive scoring or attribute inappropriate weighting to answers. Such flaws can result in inappropriate conflation or interpretation of customer responses.
The industry responded with better tools, more consumer-centric questionnaires and more rigorous testing of these models.
Although recently the current regulator the FCA has warned about advisers failing to offset any shortcomings of such risk-profiling tools with their own due diligence, the intrinsic issues the regulator had with risk profiling tools seems to be a largely historic problem.
At the moment, the majority of risk profiling tools available nowadays do useful guides for the adviser community. This is the view of Mr Willis, who explains: "More recently, we have seen the rise of independent risk profilers being used by the adviser community.
