JP Morgan Asset Management head of UK retail sales Mike Parsons has warned that IFA portfolio tools could leave clients overly exposed to UK gilts.
Parsons says asset allocation tools do not differentiate clearly between different categories of fixed income, which could leave clients at risk.
He says: “A lot of tools say you should have X amount in bonds but they do not tell you what bonds you should be investing in. Our view is that it is not specific enough.
“A lot of people are sitting on UK gilts or UK investment-grade bonds. We think there are big problems ahead for both due to the ending of quantitative easing and the issuance of £200bn of gilts.
“The market is going to move so quickly and our fear is that a lot of people are going to get caught out by a spike in UK gilt yields and the subsequent capital loss.”
Skerritt Consultants head of investments Andy Merricks says: “Asset allocation tools, which so many IFAs use because of the FSA, are shovelling people into what are supposedly low-risk gilts. It is a disaster waiting to happen.”
Worldwide Financial Planning IFA Nick McBreen says: “A lot of these tools have weighted questions that almost predetermine the outcome. If you have got stock questions that are being applied at the front end, however sophisticated the software and technology, you are going to get a menu-driven, formulaic approach.”
But Financial Technology Research Centre director Ian McKenna says: “People need to make sure they use them properly but it is not the tools that are at fault.”