Risk targeted funds can help financial advisers avoid portfolio drift, one of the significant concerns highlighted in the FSA's recent paper on assessing investment suitability, says Skandia Investment Group.
Section 4.12 of the FSA paper on Centralised Investment Propositions states that: ‘Where a firm uses an asset-allocation approach in constructing portfolios, it should ensure that it has a robust process to review each portfolio to mitigate the risk of portfolio drift. Where portfolio drift occurs, there is a danger the risk profile of the client and the risk profile of the portfolio will move out of alignment.'
Risk targeted funds can avoid the issue of portfolio drift because the financial adviser is outsourcing portfolio construction to the chosen fund group and the funds are specifically managed to stay within set volatility parameters. This means that the risk profile of the fund is managed to stay aligned to the risk profile of the customer and portfolio drift is avoided. If the risk profile of the customer changes, a different level of risk targeted fund can be selected.
In addition to portfolio drift, Section 4.11 of the FSA paper states that: ‘Where a firm creates or uses risk-rated portfolios as part of its Centralised Investment Process, it must ensure the portfolios align accurately with the risk descriptions and outputs from any risk profiling tool it employs. Where there is a mis-alignment, there is a risk of systematic mis-selling.' Used properly, risk targeted funds can avoid this.
Skandia's £1.2 billion Spectrum range of risk targeted funds was originally built to match six of the risk levels identified by the risk profiling tools on the Skandia platform. They have also been specifically matched to all leading risk profiling tools that are used by other platforms.
Ryan Hughes, portfolio manager at Skandia Investment Group, comments:
"The FSA paper is very clear in its guidance on Centralised Investment Propositions. If advisers choose to build risk targeted portfolios themselves they take on the responsibility of avoiding portfolio drift and of ensuring the portfolio is aligned with the risk tools or methodology they use. Risk targeted funds, however, effectively outsource this responsibility to the chosen fund group, who can use extensive investment research and fund management capability to ensure the funds are consistently aligned to their stated risk level. Risk targeted funds will not be for everyone but for customers that want reassurance that volatility is being managed while maximising investment returns for that level of volatility, they are a great solution for financial advisers."
|
