The new guidance from the Financial Services Authority on assessing investment suitability should be extended to consider volatility and investment risk, according to Skandia Investment Group.
The investment manager believes more advisers and investors are focusing on volatility and risk when assessing investment suitability but this is not specifically mentioned in the FSA paper.
Skandia Investment Group supports the guidance provided by the FSA paper but believes the final guidance should included explicit references to volatility and risk as important elements advisers should consider when assessing whether to recommend replacing an existing investment. The paper focuses primarily on costs, investment returns and tax as factors that advisers need to consider, however there is no explicit mention of volatility or investment risk.
With increased stockmarket volatility over the past few years, more and more advisers and their clients are looking at investments such as risk targeted funds that clearly focus on controlling volatility, whilst delivering the best possible investment return for that level of volatility. So, when recommending an investment solution to replace an existing product, advisers should consider volatility and risk alongside costs and tax implications, rather than just focus on investment returns.
In cases where volatility control is important to customers, advisers should demonstrate how the new investment solution recommended is just as, or, more capable of controlling volatility more than an existing or alternative investment, in the same way the FSA paper says advisers must be able to show how the new investment can deliver greater investment returns if that is the customer's objective.
Risk targeted funds with a track record, such as Skandia's Spectrum range, can provide a suitable solution for those clients that want to achieve maximum investment returns within a given level of risk. This is because they can demonstrate that they have stayed within prescribed volatility ranges over a period of time and delivered investment returns commensurate with that level of volatility.
Ryan Hughes, portfolio manager at Skandia Investment Group, comments:
"The FSA guidance on assessing investment suitability is very good, however, we'd like to see it explicitly covering volatility and investment risk. Investment returns, cost and tax are naturally very important factors but a customer's understanding and tolerance of risk must also be factored into a suitability assessment. Financial advisers should be able to demonstrate that the investment solution they are recommending is being specifically managed to remain within a set volatility range for its entire lifecycle, rather than just having a risk score attributed to it at any one point in time.
"There is now in excess of £6 billion held in risk targeted funds, making it one of the fastest growing investment areas of recent years and demand is likely to increase further as financial advisers continue to define their investment propositions in preparation for the implementation of the Retail Distribution Review."
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