Advisers who set their stall-out on the basis of picking investments that will consistently outperform the market or a benchmark are unlikely to deliver on their promises and the end result will be a dissatisfied client, which is good for no-one.
Adviser benefits
Many of the benefits described above also accrue to advisers and so do not need repeating. Additionally, segmenting clients into carefully created model portfolios helps advisers de-risk their businesses.
By building into the advice process a repeatable framework for documenting how clients are categorised by asset allocation and risk parameters, advisers generate an audit trail detailing the method by which clients have been assessed and why a particular model, or bespoke portfolio, has been selected or created for them.
This record should demonstrate the high levels of research and ongoing monitoring and active management that go into creating and running risk-rated portfolios. Should a worst-case-scenario arise, in which a client later complains about the advice they were given or the performance of their investments, advisers will be able to clearly demonstrate the process by which advice was given and why recommendations were made and agreed.
It is also to advisers’ advantage to be in partnership with a discretionary fund manager or investment company that offers risk-categorised investments’ portfolios.
Once again, there is an element of de-risking, this time by placing investment management under the control of qualified and expert professionals and effectively outsourcing it to an appropriate third party.
Incorporating the services of discretionary investment managers should also enhance client perceptions of professionalism and credibility within an advisory firm. Clients derive reassurance from the fact that their money is being managed in line with their objectives by investment experts, who have undertaken considerable research to determine appropriate asset allocation, investment and security selection that is designed to deliver an expected range of returns, for an expected range of volatility, over a given timeframe.
Constructing investment portfolios
The science behind constructing investment portfolios has advanced greatly over the years. Stochastic modelling, which is used for estimating the probability of different outcomes based on different factors, is a key part of the sophisticated approaches used today.
