In an increasingly outcome-driven world, do not put all your
eggs in one basket this Easter.
Everyone should understand the old adage that putting all your eggs in one basket tends to be a more risky strategy. Diversifying across a range of asset types, geographies, investment managers and securities is a sensible way to go.
An adviser’s job is increasingly complex and time-consuming, with the investment component just one facet of their growing responsibility towards a client. More and more regulatory and reporting requirements, alongside an increasingly sophisticated and informed general public in a changing tax world, see many in favour of outsourcing the specialist components of planning to experts in various fields.
One disadvantage commonly felt by advisers when outsourcing investments is that their clients expect them to be assembling the right portfolio themselves. But
such a response is more fitting for the situation years ago. Indeed, it is rapidly giving way to an acceptance that markets and options available have grown too complex to make this a sensible solution for most today.
The regulatory backdrop to investment selection also presents challenges, fraught with penalty and cost if advisers get it wrong. By outsourcing the investment process, the adviser is left with more time to get on and develop their business, building better value for clients and creating a more durable business model for themselves.
There are a variety of options available, one being the use of a multi-manager fund. Such funds can offer a highly tax-efficient way of investing, since all underlying funds managed within it are exempt of capital gains tax.
If all the assets were held as individual investments on the client’s behalf, as opposed to in a single fund wrapper, every time a change is made to that portfolio there would be a potential tax point, which has to be accounted for and which can be costly.
Another option is a multi-asset portfolio. One of the most important factors when carrying out due diligence for these types of funds is diversification. A fund must be able to take on the rougher times in investment markets by having more defensive assets, as well as some more risky components that allow the portfolio to generate good returns in the better times.
What to do when the waters get choppy
A good multi-asset fund will have these disciplines at its core, but a good manager should be able to additionally nudge the risk up in good times and down when the waters get a little choppier by adjusting the asset mix.
From a risk perspective, differing types of funds exist within the same asset class, so a good fund will likely hold a variety within each.
We are living in an increasingly outcome-driven world and, of course, investors do have differing needs – be it capital growth and higher risk, to higher income and/or low risk. One size does not fit all, so to determine the right investment solution, advisers have to spend time establishing what their clients’ needs are.
Once a solution has been selected, it is the adviser’s job to monitor it to ensure it continues to meet the objectives. If a client’s circumstances change (for example, if a tolerance for risk reduces or more income is required), then the client should be advised to switch into an equally diversified solution meeting these new needs.
Gary Potter is co-head of the multi-manager team at BMO Global Asset Management