Old Mutual’s Ventre: The benefits of risk-rating

John Ventre 160 byline

With the Retail Distribution Review just around the corner, focusing on client outcomes is more important than ever for advisers.

A key part of establishing where clients’ ‘comfort zones’ lie is in ascertaining their capacity for loss. It is useful to think of capacity for loss in terms of a pain threshold. I might be invested in a lot of assets that might produce a return for me in the future but if mentally, behaviourally and psychologically I just cannot cope with losing 20 per cent of my money, and it happens, then I may well end up telling my adviser to reduce the risk and sell out. Obviously we do not want investors to have to get to that pain point and solutions such as risk-targeted multi-manager funds can help client’s avoid this situation.

Risk-targeted funds can reduce business risk because they are less likely to suffer from customer complaints or be subject to regulatory action because they will be able to demonstrate that the fund is aligned to the customer’s risk profile.

Having a more transparent approach to running money, defining objectives and meeting client expectations is something the regulator is looking at very closely. But as well as satisfying the regulator, risk-targeted funds also benefit an adviser’s business as everyone has more certainty about how the funds are likely to perform.

Risk targeted multi-manager funds are designed and managed to stay within their particular risk bands, with each fund being constructed according to a strategic asset allocation model. If managed correctly, risk-targeted funds result in far more certainty that the fund will continue to be suitable for an individual customer.

Risk-targeted must not be confused with risk-rated, a subtle but important difference. A risk-rated approach merely assesses the risk level of a fund at a single point in time based on its past performance. This provides the investor with little certainty that this level of risk is going to remain the same in the future.

Risk-targeted funds tend to link very well with advisers’ risk profiling processes and provide that valuable audit trail that advisers really need in a post RDR world. The crux of the regulatory tailwind has been the need for advisers to prove that the portfolio they have selected matches their customers’ risk expectations and, specifically, tolerance for losses.

Of course, some advisers view themselves as being fund selectors and for them a risk-targeted multi-manager range may not be as attractive. However, for a vast swathe of advisers that position themselves as financial planners, risk-targeted multi-manager funds are proving a valuable addition to their investment process.

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John Ventre is head of multi-manager at Old Mutual Global Investors