The Cass team has produced a guide which it says can help advisers build portfolios from the initial planning through to the fund selection for all risk appetites in a “transparent” and “responsible” way.
The basis of this ‘holy grail’ is to apply a simple, rule-driven approach across the four main parts of the investment process; financial planning, risk profiling, portfolio construction and fund selection.
“There is a clear need for ‘joined up’ thinking that straddles the four parts of any advised solution,” said co-author of the report, Professor Andrew Clare.
The other key strands are the elimination of exposure to risk beyond an investor’s loss capacity, and meeting regulatory requirement for transparency in allocating wealth to cash.
“The benefit of our approach is that outcomes should be more consistent with a client’s aims where they seek to minimise maximum losses,” said Professor Steve Thomas.
In order to achieve this ‘simple and seamless’ construction Clare and Thomas say an adviser should first clearly separate an investor’s risk tolerance from their actual capacity to absorb a loss then build the portfolio accordingly.
“Mixing the two concepts in one aggregate ‘risk’ score which is then assigned to a portfolio actually confuses a client’s capacity to take risk with their actual need or desire to do so,” Thomas explained.
The next stage is to create multi-asset class portfolios where the risks of each asset class are equal, rather than the amounts invested in each class.
Moving on to the fund selection stage, Clare and Thomas say investors should then populate the portfolios with funds which offer the best outperformance in their sector.
A full explanation of the process is laid out in a white paper titled, ‘A centralised investment process: joined up investment thinking’.
