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Don’t run the risk of taking cautious title at face value


The anonymous correspondent (Relationship problem, Money Marketing letters, March 4) left me baffled. He or she appears to be suggesting that if a fund is in the cautious managed sector, a sector (like all such sectors) that has fairly loose rules and which is not monitored on a frequent basis, then that should be fine for an investor who has been identified by whatever (unrelated) risk-profiling tool the adviser happens to use as being “cautious”.

The term “cautious” is not terribly precise and the fact that a provider might attach it to a product is hardly sufficient grounds to consider that it must therefore be what the investor will consider as cautious, although it might possibly be so.

When providers assign risk-rating to their products, it is not by any robust and internationally recognised method, so comparing one provider’s “risk 4” fund with another’s is a fool’s errand for which the adviser deserves all they get if it turns out to be inappropriate. After all, one person might think that 10 per cent equity is cautious but another might think that 50 per cent is.

Surely, investors would be better served if their advisers used any risk-profiling tool as a starting point for discussion (it flushes out the ones whose thinking is inconsistent before they invest and are disappointed) and then reached agreement on an appropriate split between defensive (cash and short-dated government bonds) and growth (the rest) assets which they could then meet using funds which were invested 100 per cent in each of those asset classes, with periodic rebalancing to maintain the split and thus the risk exposure.

Using funds comprising multiple asset classes purely on the basis of their name or lightly policed sector whose compositions can drift sometimes substantially) around the starting point is running a substantial risk of the split being exactly where you don’t want it when one of those asset classes goes south.

In such circumstances, it is hardly surprising that the advice to which your correspondent refers was deemed to be unsuitable and it is unreasonable to blame a product provider or the sector creator for this. They are, after all, making no claims as to suitability, nor is it their responsibility to do so.

Bloomsbury Financial Planning


Part works

Advisers should pay careful attention to detail on partial encashments of bonds or collectives.

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