One of the key selling points of a platform-based investment is the ability to conveniently switch between a wide range of funds.
It is evident that the ability to manage and realign portfolios in a timely and cost-effective manner is currently not being used as much as we might think.
A recent delve into our fund switching statistics shows that when looking at a sample of 50,000 Skandia onshore bond plans, only a third have seen any fund switching activity since they were taken out.
This might come as a surprise to some, especially when you consider that the bond range provides access to over 400 funds and offers an online switching facility available to both the adviser and the client.
There are a number of factors that will have an impact on the balance and appropriateness of a clients’ portfolio of funds. Each of these demonstrates the need for ongoing client reviews and subsequent portfolio management activity.
A clients’ changing attitude to risk
It is likely that a client’s attitude to risk will change over time. As a client progresses through the various stages of life, the level of risk a client is prepared to take is likely to change and as a result of this change, the client may require a different balance of funds within their portfolio. Generally, clients tend to become more risk averse as they head towards retirement.
Because of the various life stages that people move through, a client’s portfolio will need to evolve over time and this will require periodic risk profiling followed by rebalancing to keep the client’s investment in line with their attitude to risk, if needed.
Platforms and the tools that platforms offer can make the process of reviewing and rebalancing more straightforward and less time consuming for all involved.
It is possible that a portfolio set up five years ago, which originally matched the clients’ risk profile, will not have the same risk profile today. Funds within a portfolio will exhibit different growth rates and this means over time a portfolio is likely to become overweight in the funds that have performed particularly well.
The growth and out-performance of certain funds could influence the overall risk profile to such an extent that the portfolio exper-iences a drifting effect which ultimately leads to discrepancy between the portfolio’s risk rating and the clients’ appetite for risk.
Regular monitoring and subsequent rebalancing will help to ensure that the required risk profile is maintained. Some providers offer an automatic portfolio rebalancing option which can help to ensure a portfolio retains the desired asset allocation without the need for the adviser or client to actually rebalance the portfolio themselves.
This type of service can help advisers overcome the administrative effort associated with fund switching, particularly if the adviser does not have delegated witching authority.
Opting for a risk rated fund is another option as the rebalancing takes place automatically within the fund and without incurring any find swit- ching or CGT charges.
In order to demonstrate how portfolio drift can occur, consider for example a life fund portfolio using four funds.
Each of the four funds selected make up 25 per cent of the portfolio* which had a risk rating of six when it was constructed five years ago, which was in line with the clients’ appetite for risk at the time.
If this portfolio was not rebalanced, over the five years, the portfolio would look considerably different from when it was created, with the risk level of the portfolio likely to increase.
Due to the different performance levels of the four funds selected, in just five years, the risk rating for the portfolio would have moved from six to eight.
It is unlikely that the clients’ appetite for risk would have moved from six to eight in the space of five years, which means the portfolio is no longer aligned to their risk profile. While during the five-year period, the total value of the portfolio in this example will have benefited from being left alone, the balance of the portfolio and risk rating means the portfolio is now no longer meeting the clients’ needs from a risk perspective.
Client expectation is not likely to be met if the portfolio has drifted to this degree. The client will expect to be taking no more or no less risk than they originally agreed with their adviser.
To find their investment is exposed to a greater degree of risk than they are comfortable with could be unwelcome news. Client outcomes are becoming increasingly important and advisers will need to do all they can to aim to meet client expectation.
According to figures from Financial Express, of the top 50 life funds listed five years ago, only two funds retain their top 50 ranking, with the top ranked life fund in July 2003 falling to 226th in the rankings by July 2008.
This demonstrates the risk that the highest performing funds of today may not be the top funds of the future, which means at some point a clients’ portfolio may need to be re-assessed in order to manage out any underperforming funds.
We all know that investing in a portfolio of funds is a medium to long-term activity. However, with the movement of high-profile fund managers within the industry and the changing fortunes of certain funds, advisers and clients must be prepared to review some of their fund choices.
Rebalancing can add real value to both clients and advisersFor clients the potential benefits of ongoing reviews, a well managed portfolio and the provision of port- folio reconstruction advice, are huge.
Funds, portfolio planning tools and the ability to switch funds in an efficient and cost effective way are essential factors to consider when selecting a product and platform provider.
Ongoing portfolio reviews can also benefit the adviser, by generating recurring revenue streams giving advisers a more consistent and predictable income which ultimately builds real value into their business.
Portfolio management and rebalancing is clearly a ‘win win’ for advisers and clients and it’s certainly an area of financial advice that we expect to grow rapidly over the next few years.