I will return to the complexities of this practice; the research capabilities required and resource intensiveness of the processes that underpin the frameworks of the sophisticated approaches used by some investment managers today. But first, I will consider why segregating clients by risk is a good idea, benefiting both clients and advisers.
Client benefits
Left to manage their own investment portfolios, many non-professional investors will chase last year’s returns, make decisions based on past market performance and emotional or non-rational factors. Efficient tax planning, asset allocation, portfolio modelling and rebalancing are unlikely to feature at all, or at best in a haphazard, unplanned fashion. Some investors can therefore considerably jeopardise, and perhaps even wreck, their chances of achieving their financial goals; in fact, many may even find it difficult to preserve their wealth.
Advisers who offer an antidote to this approach by focusing on financial planning and wealth management advice will deliver the most benefits to their clients.
Few, if any, clients are likely to have the time, knowledge or skills needed to create their own comprehensive financial plans that incorporate lifetime goals, which may range from buying a house to saving for school fees, retirement planning or something else.
In investing to meet these goals, portfolios should be constructed in such a way that take into account clients’ attitude to risk, capacity to absorb potential losses, time horizons as well as capital growth and income requirements, among others. Qualified financial advisers possess these skills and they should form the core of their client proposition.
By making it clear to clients that, based on their circumstances and goals, a given asset mix is appropriate for them, with compelling reasons why and extrapolations of expected performance over an appropriate time frame, an adviser can realistically manage their expectations and demonstrate when, and by what means, financial goals are likely to be met.
This helps gives clients confidence in the investment and advice process and forms part of a valuable financial plan that will set them on their way to achieving their goals. This approach also means that unrealistic expectations of investment performance are not entertained.
